5. Capital account balance is a
balance.
Answers
Answer:
The balance of payments (BOP) is the record of any payment or receipt between one nation and its nationals with any other country. The current account, the capital account, and the financial account make up a country's BOP. Together, these three accounts tell a story about the state of an economy, its economic outlook, and its strategies for achieving its desired goals.
A large volume of imports and exports, for example, may indicate an open economy that supports free trade. On the other hand, a country that shows little international activity in its capital or financial account may have an underdeveloped capital market and little foreign currency entering the country in the form of foreign direct investment.
A current account records the flow of goods and services in and out of a country, including tangible goods, service fees, tourism receipts, and money sent directly to other countries either as aid or sent to families. A financial account measures the increases or decreases in international ownership assets that a country is associated with, while the capital account measures the capital expenditures and overall income of a country.
Here we focus on the capital and financial accounts, which tell the story of investment and capital market regulations within a given country.
KEY TAKEAWAYS
A country's balance of payments is made up of its current account, capital account, and financial account.
The capital account records the flow of goods and services in and out of a country, while the financial account measures increases or decreases in international ownership assets.
Positive capital and financial accounts mean a country has more debits than credits making it a net debtor to the world. Negative accounts make the country a net creditor.
The Capital Account
A country's capital account refers to any and all international capital transfers. The overall expenditures and income are measured by the inflow and outflow of funds in the form of investments and loans flowing in and out of the economy. A deficit shows more money is flowing out, while a surplus indicates more money is flowing in.
Along with non-financial and non-produced asset transactions, the following are also included:
Dealings such as debt forgiveness
The transfer of goods and financial assets by migrants leaving or entering a country
The transfer of ownership on fixed assets and of funds received for the sale or acquisition of fixed assets
Gift and inheritance taxes
Death levies, patents, copyrights, royalties
Uninsured damage to fixed assets
Complex transactions with both capital assets and financial claims may be recorded in both the capital and current accounts.
The Financial Accounts
A country's financial account is broken further down into two sub-accounts: the domestic ownership of foreign assets and the foreign ownership of domestic assets.
If the domestic ownership of foreign assets portion of the financial account increases, it increases the overall financial account. If the foreign ownership of domestic assets increases, it decreases the overall financial account, so the overall financial account increases when the foreign ownership of domestic assets decreases. Together, a country's domestic ownership of foreign assets and foreign ownership of domestic assets measure the international ownership of assets with which the country is associated.
The financial account deals with money related to foreign reserves and private investments in businesses, real estate, bonds, and stocks. Also detailed in the financial account are government-owned assets such as special drawing rights at the International Monetary Fund (IMF), or private sector assets held in other countries, local assets held by foreigners—government and private—and foreign direct investment (FDI).