BALANCE ON CAPITAL ACCOUNT

Описание: ECONOMICS - 12

CHAPTER - BALANCE OF PAYMENTS

TOPIC - BALANCE ON CAPITAL ACCOUNT

Capital Account Balance of Payments
The capital account measures transfer in assets and liabilities. For example, this may involve a Japanese firm building a factory in the UK. This is counted as a credit on the UK Capital Account. The Capital account can also involve the purchase of securities and liabilities, for example, a Japanese Banker buying UK Government securities.

Note in the UK the official name for the capital account is now the financial account.

If a country has a current account deficit then, assuming exchange rates are floating, it will have an equivalent capital account surplus. This is necessary to finance a current account deficit.

Some people worry about a current account deficit. But, if it is financed by a capital account surplus e.g. investment then this can be beneficial.

Capital Account
The capital account records all transactions which cause a change in the assets or liabilities of the residents/ Government. It includes

Foreign direct investment (FDI): FDI inwards is a positive entry and FDI outwards is a negative entry.
Foreign institutional investment (FII)
Borrowings and lendings to and from abroad
Change in foreign exchange (FOREX) reserves: Increase in FOREX is a negative entry and decrease is a positive entry.
[You may read- Types of Foreign Investment]

The Balance of payment must always be in balance. The deficit in the current account is financed by a surplus in the capital account.

To illustrate- if the current account is in deficit (or the import is more than export), the excess import bill of the country is paid either by borrowing from other countries or selling its assets (FDI/ FII).





If in case, a country is unable to borrow money or attract capital inflows in the form of FDI/ FII, it has to use its foreign exchange reserves.

[You may read- Foreign Exchanges Reserves of India]

Therefore, the BOP deficit (excluding FOREX reserves) is reflected in the decline in FOREX reserves and BOP surplus in the increase in FOREX reserves.

The BOP position of a country is an important indicator of its economic well-being.

In 1991, India had a BOP crisis. We had a huge current account deficit and capital inflows were not adequate to finance the deficit. Even FOREX reserves were not sufficient to pay for the imports.

India had to mortgage gold to the Bank of England and the central bank of Japan to get FOREX to pay for imports.

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