The Capital Account balance is equal to
a. Net (financial) capital inflows minus Net (financial) capital outflows
b. The excess of exports over imports
c. The Current Account Balance
d. Net (financial) capital outflows minus Net (financial) capital inflows
e. The Excess of imports over exports
The correct answer and explanation is:
The correct answer is a. Net (financial) capital inflows minus Net (financial) capital outflows.
Explanation:
The Capital Account is a key component of a country’s balance of payments, which records all economic transactions between residents of a country and the rest of the world. Specifically, the Capital Account records the net flow of financial resources, including investments and loans, into and out of a country.
The balance on the Capital Account is determined by two key factors:
- Net (Financial) Capital Inflows: This represents the total amount of foreign capital invested in the country. This includes investments in stocks, bonds, and real estate, as well as loans and other forms of foreign direct investment.
- Net (Financial) Capital Outflows: This represents the capital that residents of the country are sending abroad for investment purposes. It includes investments made in foreign assets and loans issued to foreign entities.
The Capital Account balance is calculated by subtracting Net Financial Capital Outflows from Net Financial Capital Inflows. This calculation provides a measure of how much capital is being absorbed into the domestic economy from foreign sources and how much is being sent abroad.
If the result is positive, it indicates that more capital is flowing into the country than leaving, which can signify strong investor confidence and may have a positive impact on the domestic economy. On the other hand, if the result is negative, it indicates that capital is flowing out of the country, which may suggest a decrease in investment confidence or economic instability.
It’s important to distinguish the Capital Account from the Current Account, which records the trade balance (exports minus imports), income from investments, and transfers. The two accounts are interrelated but track different types of financial flows.