Capital Account – Definition

Cite this article as:"Capital Account – Definition," in The Business Professor, updated September 10, 2019, last accessed June 2, 2020, https://thebusinessprofessor.com/lesson/capital-account-definition/.

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Capital Account Definition

A capital account is an account that gives a summary of the transactions executed by a country with other entities and countries, it reflects the capital expenditure and income of the country. A capital account is often used in macroeconomics or international economics.

A capital account is an account that depicts transactions such as imports, exports, investments, loans and other economic transactions that flow in and out of a country. It is the second half of balance of payments, a current account being the other half. In accounting, a capital account is also called shareholders’ equity, it is the account that reflects the net worth or net change in the ownership of a company.

A Little More on What is a Capital Account

The balance of payments of a country comprises of two accounts; the current account and the capital account. Through a capital account, one can have a sneak peek into the transactions made between a country and others. The investment portfolios, import, export, and all foreign investment that can be directly linked to a country are reflected on this account.

Hence, the economic health that a company services from import and exports is revealed in the capital account. This account also reflect how appealing a country is to foreign investors. The financial stability and future economic health if a country is expressly reflected by its capital account.

Capital Account Is Referred to as the Financial Account By The IMF

The International Monetary Fund (IMF) regards the capital account as the financial account owing to the fact that it is the account that depicts the financial health and net cash flows of a country. The net change in asset or changes in the position of assets owned by a country are also reflected through the capital account. Countries of the world make financial claims through the financial accounts or capital accounts. A country can either have a positive net foreign assets or negative net foreign assets.

A positive net foreign assets indicates that the country is a net creditor, meaning its financial claims on the rest of the countries exceeds their claims on it. The country is a net debtor if negative.

The position of net debtor or net creditor held by a country is not static or permanent, this position changes over time. The IMF also evaluate increase or decline in the ownership of assets through the financial account.

Generally, a capital account reflects import, export, and investment portfolios of a country, this include a record of foreign direct investments and foreign exchange reserves held by the country. This does not include transactions that affect trademarks, rights or savings of the country.

Corporate Capital Accounts

A capital account has a slightly different meaning in accounting as against how it is use in international accounting. The capital account of a business is a financial record of the retained earnings and capital contributed to the business by its owner. The capital account sums up the amount that the company has, it is the cumulative amount of the money held by the company at creation subtracted from dividends paid to shareholders. The capital account is also called shareholders’ equity in accounting.

Reference for “Capital account”

https://www.investopedia.com › Investing › Financial Analysis

https://www.investopedia.com › Insights › Markets & Economy

https://en.wikipedia.org/wiki/Capital_account

https://www.thebalance.com › Investing › US Economy › Trade Policy

https://economictimes.indiatimes.com › Definitions › Economy, Budget

Academic research on “Capital account”

Capital account liberalization, financial depth, and economic growth Klein, M. W., & Olivei, G. P. (2008). Capital account liberalization, financial depth, and economic growth. Journal of international money and finance27(6), 861-875. We show a statistically significant and economically relevant effect of open capital accounts on financial depth and economic growth in a cross-section of countries over the periods 1986–1995 and 1976–1995. Countries having open capital accounts had a significantly greater increase in financial depth and, over the 20-year period, greater economic growth. These results, however, are largely driven by the developed countries included in the sample. The observed failure of capital account liberalization to promote financial deepening among developing countries suggests potentially important policy implications concerning the desirability of opening up the capital account.

Capital account liberalization and economic performance: survey and synthesis Edison, H. J., Klein, M. W., Ricci, L. A., & Sløk, T. (2004). Capital account liberalization and economic performance: survey and synthesis. IMF Staff Papers51(2), 220-256. This paper surveys the literature on the effects of capital account openness and stock market liberalization on economic growth and provides a synthesis in which we reconcile some of the different results presented in the literature. Various empirical measures used to gauge the presence of controls on capital account transactions and the liberalization of equity markets are discussed. We compare detailed measures of capital account controls that attempt to capture the intensity of enforcement with other indicators that simply capture whether controls are present. A detailed review of the literature is followed by an empirical section in which we trace the divergence in published results to differences in country coverage, sample periods, indicators of liberalization, and control variables across studies. Specifically, we show that when an institutional variable such as government reputation is added to the specification, the significance of capital account openness vanishes. Also, we demonstrate that enriching the specification by allowing for nonlinearities helps explain why different studies that ignore the nonlinear nature of the relationship find different results.

Capital account liberalization: What do cross‐country studies tell us? Eichengreen, B. (2001). Capital account liberalization: What do crosscountry studies tell us?. The world bank economic review15(3), 341-365. Capital account liberalization, it is fair to say, remains one of the most controversial and least understood policies of our day. One reason is that different theoretical perspectives have very different implications for the desirability of liberalizing capital flows. Another is that empirical analysis has failed to yield conclusive results.

Capital account liberalization: Theory, evidence, and speculation Henry, P. B. (2007). Capital account liberalization: Theory, evidence, and speculation. Journal of Economic Literature45(4), 887-935. Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. Most papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

Capital account liberalization as a signal Bartolini, L., & Drazen, A. (1996). Capital account liberalization as a signal (No. w5725). National bureau of economic research. We present a model in which a government’s current capital controls policy signals future policies. Controls on capital outflows evolve in response to news on technology, conditional on government attitudes towards taxation of capital. When there is uncertainty over government types, a policy of liberal capital outflows sends a favorable signal that may trigger a capital inflow. This prediction is consistent with the experience of several countries that have liberalized their capital account

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