The capital balance is an account that shows all the income and payments that occur abroad. This, as long as they are as a consequence of capital transfers, as well as the acquisition of non-financial assets.
The capital balance shows all capital movements, both short-term and long-term, as well as the variation in foreign exchange reserves that a country has compared to third parties. This balance also includes all purchases of goods and services, as well as aid that comes from abroad. Therefore, it records the movement of capital, such as the purchase and sale of non-financial goods.
Thus, this balance, together with the current account balance, form what is known as the “basic balance”.
The capital balance indicates whether a country is a creditor or a debtor vis-à-vis third parties.
What elements does the capital balance include?
The capital balance, as a component of the balance of payments, includes a series of elements that have been established by the International Monetary Fund (IMF) and are the following:
- Capital transfers receivable and payable between residents and non-residents.
- The acquisition and disposal of non-produced non-financial assets between residents and non-residents.
Therefore, in line with the IMF's provision in its Balance of Payments Manual, these elements are those included in said balance.
Balance of capital and balance of payments
The capital balance is a sub-balance that is integrated into the balance of payments. Thus, this balance, together with the current account balance, form what is known as the basic balance.
Therefore, the structure of how this balance would appear within the balance of payments would be the following:
What does it mean that the capital balance is negative or positive?
This balance, as we said at the beginning, shows all the income and payments that occur abroad, as long as they are as a consequence of capital transfers, as well as the acquisition of non-produced non-financial assets.
Therefore, when we calculate the difference between the payments made and those received, the final result can show a positive or negative balance.
If the balance is positive, there is what is known as a capital surplus. In other words, the volume of capital imports of a country is less than that of capital exports. On the other hand, if the balance is negative, there is a capital deficit, that is, a situation in which the volume of capital spending in a country is greater than that of capital inflows.
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