Net Capital Outflow

Published Jan 8, 2023

Definition of Net Capital Outflow

Net capital outflow (NCO) is defined as the net amount of capital that leaves a country over a certain period of time. That means it is the difference between the total amount of capital that is invested in a country and the total amount of capital that is invested abroad. Or in other words, it is the net amount of capital that is flowing out of a country. A negative NCO means that the country invests less in other countries than those countries invest in it, and vice versa.

Example

To illustrate this, let’s look at the example of a small imaginary country. In a given year, the citizens of this country invest a total of USD 100 million in foreign countries. At the same time, foreign investors invest a total of  USD 200 million in the domestic economy. That means the NCO for this country is USD -100 million (USD 100 – USD 200). The negative NCO signals that the country actually experienced a net capital inflow (because more money was invested domestically than abroad).

Why Net Capital Outflow Matters

Net capital outflow is an important indicator of a country’s economic health. It is closely related to the balance of payments and the exchange rate of a country’s currency. A low NCO can be a sign of a healthy economy, as it indicates that foreign investors are confident in the country’s economic prospects.

On the other hand, a high NCO can be a sign of an unhealthy economy, as it indicates that foreign investors are not confident in the country’s economic prospects. Therefore, it is important for policymakers to monitor net capital outflow in order to make informed decisions about economic policy.