Capital Account

Published Feb 8, 2023

Definition of Capital Account

The capital account is a component of a country’s balance of payments. It measures the net change in a country’s ownership of foreign assets. That means it records all transactions that involve the transfer of ownership of financial assets from one country to another. These transactions can be either direct investments, portfolio investments, or other investments.

Example

To illustrate this, let’s look at the capital account of the imaginary country of Zogonia. In 2019, Zogonia had a net capital inflow of USD 1.2 trillion. That means Zogonia received more foreign investments than it sent out. This inflow was mainly caused by foreign investors buying Zogonian stocks and bonds. In addition, Zogonia also received foreign direct investments, such as the purchase of Zogonian companies by foreign investors. On the other hand, Zogonia also made some investments abroad, such as the purchase of foreign stocks and bonds.

Why Capital Account Matters

The capital account is an important indicator of a country’s economic health. A positive balance of payments (i.e., a net capital inflow) indicates that the country is attractive to foreign investors. This often leads to an increase in economic growth and job creation. On the other hand, a negative balance of payments (i.e., a net capital outflow) indicates that the country is not attractive to foreign investors. This often leads to a decrease in economic growth and job losses.

In addition to that, the state of a country’s capital account can impact its exchange rate, foreign reserves, and overall economic stability. Thus, tracking and understanding the it is crucial for governments and central banks to make informed monetary and fiscal policy decisions.