Capital Account

What is the Capital Account?

The Capital account, in international Macroeconomics, is the part of the balance of payments which records all transactions made between entities in one country with entities in the rest of the world. In the international trade and commerce terms are used current account and capital accounts. Both the terms are used to relate the trade and business dealing with the nation with others. The capital account deals with the change in the ownership of a country’s assets, while the current account showcases the change in the country’s net Income. These two accounts together form the balance of payments of a country.

Both the accounts have a deficit or surplus situations. A surplus capital account means the money is flowing in the country and this inflow displays the changes in the ownership of national assets by the way of sale or borrowing. On the other hand, a deficit situation occurs where ore money is flowing out of a country to get assets and right abroad. The money is going out of the country and it results in the acquisition of assets.

Capital Account Surplus

For instance, a foreign company acquires a hotel chain in India such a transaction requires billions, which helps the capital account to become surplus. The country will receive the inflows of billions and it also means that a domestic entity will lose the ownership of the hotel chain. The surplus account is not against any supply chain of goods and services supplied to a foreign entity, which can qualify the income or payment of fee against the delivery of some service.

Capital Account Deficit

For instance, an Indian corporate company acquires an American steel producer in a deal involved in payment with billions of dollars. The large transaction may turn the capital account into a deficit situation and the outflow of the capital account may exceed the total inflow due to the size of the deal. This will create a deficit situation in the capital account but the deal will result in an Indian entity having ownership on the foreign asset.

Calculate Capital Account

The capital account is the difference between the change in foreign ownership of domestic assets and change in domestic ownership of foreign assets.

Capital Account Formula

Capital Account = Change in the Foreign Ownership of Domestic Assets – Change in Domestic Ownership of Foreign Assets

The capital account includes - Foreign Direct Investment, Foreign Portfolio Investment, Other Investments, Reserve Account, Capital Account and Current Account