Capital Account
Quick Definition
A component of the balance of payments that records capital transfers and the acquisition or disposal of non-financial assets between countries.
Key Takeaways
- Records capital transfers and non-financial asset transactions between countries
- Part of the balance of payments alongside the current account
- Typically mirrors the current account — deficit in one means surplus in the other
- Includes items like debt forgiveness, migrant transfers, and intellectual property sales
What Is Capital Account?
The capital account is one of the main components of the balance of payments, tracking cross-border capital transfers and transactions in non-produced, non-financial assets such as patents, trademarks, and land purchases by foreign entities. In broader usage, the term sometimes encompasses the financial account (which tracks investment flows like FDI, portfolio investment, and reserve assets). Capital account surpluses indicate net capital inflows, while deficits signal outflows. The capital account mirrors the current account — a current account deficit is typically offset by a capital account surplus as foreign capital flows in to finance the gap.
Capital Account Example
- 1A developing nation receiving debt forgiveness from creditor countries records this as a capital account credit.
- 2When a foreign government purchases land for an embassy, it appears as a capital account transaction.
- 3Countries with current account deficits typically have capital account surpluses as foreign investment flows in.
Related Terms
Current Account
A component of a country's balance of payments that records trade in goods and services, net income from abroad, and net transfer payments.
Balance of Payments
A comprehensive record of all economic transactions between residents of a country and the rest of the world during a specific period.
Foreign Direct Investment (FDI)
An investment made by a company or individual in one country in business interests in another country, involving establishing operations or acquiring assets.
Capital Flows
The movement of money for investment, trade, or business operations between countries, including foreign direct investment, portfolio investment, and bank lending.
Exchange Rate
The price of one currency expressed in terms of another, determining how much of one currency is needed to purchase a unit of another.
GDP (Gross Domestic Product)
The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
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