•The capital and financial accounts of the balance of

payments measures all international economic

transactions of financial assets.

The capital account is made up of treansfers of

finanacial assets and the acquisition and disposal of
nonproduced/nonfinancial assets.

The financial account connsisit of three components :

direct investments , portfolio investment and other
asset investment.
- maturity
- ownership
 Financial accounts
•Direct Investments - the investment measure
that is the net balance of capital dispersed from
and into the country for the purpose of exerting
control over the assets.
• Establishing a facility to another country or
purchasing a company
• Capital flows out of the country = it enters the
balance of payments as a negative cash flow
• Capital inflows – it enters the balance of
payments posiyively
 Direct Investments
• 10% or more voting rights of foreign investors
= foreign direct investment
• The source of concern over foreign investment
in any country :
– Control
– Profit

• Capital whether shorterm or longterm, flows

to where the investor believes it can earn
greatest return for the level of risk.
 Portfolio Investment
• This is the net balance of capital that flows in and
out of the country but does not reach the 10%
ownership threshold of direct investment.
• The capital invested in activities that are purely
profit-motivated , rather that ones made to
control or manage the investment.
– Purchases of debt securities,bonds,interest bearing
bank accounts and like. ( return only)
– provide no vote or control over the party issuing the
debt
Other Investment Assets/Liabilities
• Consisit of various short term and longterm
trade credits,cross-border loans from all types
of financial institutions, currency deposits and
other account receivable and payable related
to cross-border trade
Current and financial account balance
relationship
• There is an inverse relationship
• The methodology of the BOP , double –entry
bookeeping in theory , requires that the
current and finnacial accounts be offsetting
unless the country’s exchnage rate is being
highly manipulated or controlled by
governmental authorities.
Current and financial account balance
relationship
• Net errors and omissions ensures that BOP
actually balances.
• Official reserves account is the total resrves
held by official monetary authorities within a
country.
– Fixed excahnge rate regime
– Floating exchange rate system