Capital account, Managerial Economics

CAPITAL ACCOUNT

This records all transactions arising from capital movements into and out of the country.  There are a variety of such capital flows recorded, namely:

i. Long term capital:

This consists of:

a.        Government to Government borrowing and lending

b.       Government borrowing from international organizations

c.        Investment by foreigners at home in such projects as factories, mines and plantations and by nationals abroad in similar projects.

d.       The buying of shares by foreigners in home companies and by nationals in foreign companies.

ii.   Short term capital ("hot money")

Refers to changes in bank balances held by foreigners in home banks and by nationals in foreign banks.

If money comes into the country (e.g. deliberate borrowing abroad by a domestic company or foreign investment in the country), it is recorded as a credit item, while investments abroad etc is recorded as a debit item.

When the current account and the capital account are combined, and we compare the total debits and credits, this is termed the balance for official financing (it used to be termed the  "total currency flow").  This shows the final net outflow, or inflow arising from current and capital transactions.

Posted Date: 11/30/2012 5:18:40 AM | Location : United States







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