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Definition: The capital account is part of a country's balance of payments. The other two parts are the financial account and the current account. The financial account measures the net change in ownership of foreign and domestic assets. The current account measures the international trade of goods and services plus net income and transfer payments.
The capital account is kind of a miscellaneous account.
It measures financial transactions that don't affect income, production or savings of the economy. They are put into the capital account so they don't affect the Gross Domestic Product or the Gross National Product reports.
For example, it includes international transfers of ownership of things like drilling rights, trademarks and copyrights. They might produce an asset in the future, in which case they would be included in the financial account. If they produced income, that would be counted in the current account. Many of the items in the capital account may not have a large value, but when it does, it's recorded. For example, the largest component might be a cross-border insurance payment, but this doesn't occur every year. For this reason, the capital account is usually not as large as the current or financial accounts.
The 2 Sub-Accounts in the Capital Account
The capital account is divided into two main sub-accounts: acquisition and disposal of non-produced, non-financial assets and capital transfers.
These are difficult to measure, since they don't show up in the regular reports used by the Bureau of Economic Analysis (BEA). That's usually because they are large, but not regular transactions. However, if they do show up, the BEA has an account to put them in.
1. Acquisition and Disposal of Non-produced, Non-financial Assets - This measures the purchase and sale of two types of assets: tangible and intangible assets. Tangible assets include the rights to natural resources, such as mineral rights, electromagnetic spectrum, and offshore drilling rights.
Intangible assets include patents, copyrights and trademarks. They also include franchises and leases. For example, in the past the capital account measured the receipts of U.S.-based sports leagues to establish franchises in Canada, U.S. State Department receipts for the sale of land in London, and payments made to purchase the rights to negotiate with foreign athletes. The BEA admits there is no reliable way to measure the separate value most of these transactions. Often they are mixed up in royalties and license fees, in the net income section of the current account. Or, they could be tied to the business, professional, or technical services accounts in the trade portion of the current account. (Source: New York Federal Reserve Bank, Balance of Payments; Bureau of Economic Analysis, Capital Account)
2. Capital Transfer:There are three components of the capital transfer sub-account. The first is insured catastrophic losses. These are usually large, but infrequent, insurance payments from foreign insurance companies. The BEA determines on a case-by-case basis if it constitutes a catastrophic loss.
The second component of this sub-account is debt forgiveness. The only portion of the debt that is measured is the principal and any overdue interest payments. Future interest payments that haven't accrued aren't counted. Usually, the only data available is for the debt forgiven by a country's government, such as U.S. Treasury notes.
The third component is specifically related to the transfer of the U.S. government's assets in the Panama Canal Commission to the Republic of Panama.
Deficits and Surpluses
A deficit in the capital account is created by acquisitions of nonproduced nonfinancial assets, such as purchases of rights to natural resources. When a country's residents, businesses or government forgive a debt, that also adds to the deficit.
A surplus is created by disposals of nonproduced nonfinancial assets, such as sales of rights to natural resources. In addition, when foreign insurance companies pay to cover catastrophic losses, that adds to the surplus.
Why Is the Capital Account Important?
The capital account is important because it's a component of the balance of payments. Combined with the financial account, it represents the transfer of capital to help pay for the the current account, which includes the trade of goods and services. The capital account is usually not very large. However, when combined with the financial account, they could run a large enough surplus to offset a trade deficit. Unfortunately, that means the country is selling off its assets, whether tangible or intangible, to purchase foreign goods and services. Article updated November 19, 2014
How the Capital Account Is Part of the Balance of Payments
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