Definition:
A capital account is a type of balance of payments account that records international transactions involving the purchase and sale of non-financial assets, such as land, buildings, and investments. It also includes transactions related to capital transfers, such as gifts, inheritances, and debt forgiveness.
Key components of the capital account:
- Non-financial assets: Transactions involving the purchase and sale of non-financial assets, such as land, buildings, and investments.
- Capital transfers: Transactions related to capital transfers, such as gifts, inheritances, and debt forgiveness.
- Foreign direct investment (FDI): Investments made by foreign entities in a country’s economy.
- Portfolio investment: Investments in foreign securities, such as stocks and bonds.
Why is the capital account important?
- Balance of payments: The capital account is one of the three main components of the balance of payments, along with the current account and the financial account.
- Economic activity: The capital account can be an indicator of a country’s economic activity, as it reflects the flow of foreign investment into and out of the country.
- Exchange rates: The capital account can influence exchange rates, as it reflects the demand for a country’s currency.
In essence, the capital account is a component of the balance of payments that records international transactions involving the purchase and sale of non-financial assets and capital transfers.
