Capital Account

The term capital account is used most frequently in the field of macroeconomics and international finance and monetary matters. It is also known as the financial account. Therefore both the terms can be used for this thing.

Importance of a capital account

The importance of a capital account can be well imagined from the fact that this makes one of the two very important components of the balancing system of payments and finances. The other one along with capital account is the current account. Current account is considered to be the representative of the net income of a nation or the account holder. On the other hand the capital account is concerned with the changes occurring in the net change in income or the assets of a nation.

Influx of money to capital account

When there is a surplus amount of funds or money in the capital account then it is a good omen and it reflects that money is flowing into the country. This means that there is a huge influx of revenue going on in the country through different banks and financial units. On the other hand the surplus increase in the current account has some other meaning. According to this concept, there are effective borrowings or sales going on of different assets. Hence this money is not staying stably in the accounts.

Deficit in capital account

On the other hand if a deficit is being observed in the capital account of the nation, then this means that more and more money is going out of the country. However there is a positive aspect of this situation as well. Flowing of money outside also means that the claim of a nation on the foreign assets is also increasing. According to IMF there has been a totally different notification of the capital account. According to this explanation, there are two top level divisions of the capital account. One is the financial account and the other one is the capital account.

Favor of capital account

Capital account is also considered favorably in the terms of a long term investment being made in the limit of capital revenues. When a foreigner invests in a country, this means that the influx and hence the surplus amount is increasing in the accounts of that specific country.