Balance of Capital Account

The balance of capital account is a component of the balance of payments that records transactions involving capital transfers and the acquisition and disposal of non-produced, non-financial assets. It is distinct from the financial account, which records transactions in financial assets and liabilities, though the two are often grouped in presentations of the accounts.

Components

The capital account records capital transfers, which are transfers of ownership of fixed assets or of funds linked to the acquisition or disposal of fixed assets. It also records the acquisition and disposal of non-produced, non-financial assets, including natural resources, patents, copyrights, and leases.

In the standard presentation of the balance of payments, the capital and financial accounts together record the transactions that finance the current account. A current account surplus is matched by net capital and financial outflows, and a deficit by net inflows, reflecting the identity that the accounts must balance.

Relationship to the Financial Account

The financial account records transactions in financial assets and liabilities, including direct investment, portfolio investment, financial derivatives, and other investment. It is typically much larger than the capital account for most economies, since transactions in financial assets dominate international capital flows.

The distinction between the capital and financial accounts reflects the classification of assets in the balance of payments. The capital account covers non-financial and non-produced assets, while the financial account covers financial claims. Confusion sometimes arises because the term capital account is used loosely to refer to the whole of the capital and financial accounts.

Interpretation

The balance of the capital account, together with the financial account, indicates the net flow of funds into or out of a country. A surplus on the combined accounts indicates net inflows, which finance a current account deficit. A deficit indicates net outflows, which correspond to a current account surplus.

The composition of the flows matters for the analysis of external vulnerability. Direct investment is generally considered more stable than portfolio and other flows, and the maturity structure of the flows affects the risk of sudden reversals. The analysis of the capital account therefore informs the assessment of external balance and of financial stability.

Measurement

Measurement of the capital account requires data on capital transfers and on transactions in non-produced, non-financial assets. These data are collected through surveys and administrative records, and their accuracy varies across countries.

The capital account is often small relative to the financial account, and its measurement is subject to error. In practice, the balance of payments includes a residual item, net errors and omissions, which captures the discrepancies between the recorded transactions and the underlying flows. The analysis of the accounts must therefore consider the reliability of the data and the size of the residual.

The Balance of Payments Framework

The balance of payments is a systematic record of all economic transactions between residents of a country and the rest of the world. It comprises the current account, the capital account, and the financial account, and it is constructed so that the accounts sum to zero, with any discrepancy recorded as net errors and omissions.

The framework provides a comprehensive picture of a country's external position and of the flows that finance it. It is used to analyse external balance, to assess vulnerability, and to inform the design of policy.

Capital Transfers

Capital transfers are a component of the capital account. They include transfers of ownership of fixed assets, such as the transfer of infrastructure or of equipment, and transfers of funds linked to the acquisition or disposal of fixed assets, such as investment grants.

Debt forgiveness is also recorded as a capital transfer, since it involves the cancellation of a financial claim without compensation. The treatment of debt forgiveness in the accounts affects the measured external position and the analysis of sustainability.

Non-Produced Non-Financial Assets

The acquisition and disposal of non-produced, non-financial assets are recorded in the capital account. These include natural resources, such as land and mineral rights, and intangible assets, such as patents, copyrights, and trademarks.

Transactions in these assets are distinguished from transactions in produced assets, which are recorded in the financial account as investment. The distinction reflects the nature of the assets and the treatment of their acquisition in the accounts.

Statistical Issues

The measurement of the capital account is subject to error, since the data are collected through surveys and administrative records and may be incomplete. The capital account is often small relative to the financial account, and errors in its measurement may be obscured by the residual item.

The analysis of the accounts must therefore consider the reliability of the data and the size of the errors and omissions. Large residuals may indicate unrecorded transactions, including capital flight or misinvoicing, and they complicate the interpretation of the accounts.

See also

• International economics
• Net Capital Outflow
• National Accounts