theme 4 : capital account

4 components of the current account

• trade in goods

• trade in services

• transfers

• investment income

what does the capital account do

• simply records receipts from foreign investment (e.g. hot money chasing a better rate of return)

• takeovers of uk firms by international firms

• purchases of uk bonds

• uk investments in the rest of the world

• runs parallel with the current account

how are the current and capital account related

• any current account deficit is matched by a capital account surplus

• a current account surplus is matched by a capital account deficit

what the point of the capital account

• if insufficient capital flows come in to offset a current account deficit, then under IMF rules, a country must

• 1 - make an adjustment to the size of their stock of gold and foreign currencies i.e. a country with a balance of payments deficit might reduce their official reserves

• 2 - sell uk bonds to raise funds from nations that have a current account surplus

• 3 - encourage the sale of uk firms to overseas buyers

what is a serious implication of running a current account deficit

• worsening in national debt

• worsening in national security

• could have long term consequences e.g. selling gold stock, will never get that back, will run out quicker