SummaryAn economy’s openness must be measured considering multiple variables. For instance, all countries are considered open economies to some degree, but not all allow free movement of capitals across borders. Others might have governments that control information flows and Internet service. In this LP, we learn to analyse an open economy from a purely economic point of view, looking at their net exports and their Balance of Payments.
The capital account is one of the components of the balance of payments. It mainly reflects net foreign holdings of capital. When a country incurs on a deficit on current account, it needs to be financed by capital from abroad, it needs to have a capital account surplus. The opposite occurs in the case of current account surplus, there will be an outflow of capital to foreign countries. As stated in the sixth edition of the Balance of Payments Manual (BPM), by the International Monetary Fund, “the capital account in the international accounts shows (a) capital transfers receivable and payable between residents and nonresidents and (b) the acquisition and disposal of nonproduced, nonfinancial assets between residents and nonresidents”.
In other words, the capital account shows acquisitions and disposals of nonproduced nonfinancial assets, such as the sales of leases and licenses, as well as capital transfers (when one party provides capital resources without anything of economic value being supplied as a counterpart). The table below, taken from the BPM, shows an overview of the capital account.