Global Economic Flows: Capital Accounts and Trade Drivers

Components of International Economic Accounts

Factor Income and Receipts

The Factor Income consists largely of payments and receipts of interest, dividends, and other income generated on foreign investments that were previously made.

Unilateral Transfers Defined

Unilateral Transfers, the final category of the Current Account, are one-way payments that do not require a counter-compensating monetary action. Examples include:

• Foreign aid and reparations
• Official and private grants
• Donations and gifts

The Capital Account Structure

The Capital Account includes all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. It measures the difference between a country’s sales of assets (e.g., US, Colombia) to foreigners and the country’s purchases of foreign assets.

Categories of Capital Account Investment

The Capital Account is typically divided into three main categories:

1. Direct Investment (including FDI)
2. Portfolio Investment
3. Other Investment

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) implies the control by foreigners of productive assets in the host country (e.g., Colombia). This includes:

• The construction of new plants.
• Expansion of existing facilities.
• The purchase by foreigners of a controlling share package of a domestic company.

Portfolio Investment

Portfolio Investment mostly represents sales and purchases of foreign financial assets, such as stocks and bonds, that do not involve a transfer of control.

Portfolio investment comprises:

• Equity securities (corporate shares)
• Debt securities (bonds and money market instruments)

Other Investment Transactions

Other Investment, the third category of the Capital Account, includes transactions in currency, bank deposits, trade credits, and similar instruments.

These investments are very sensitive to both changes in relative interest rates between countries and the anticipated change in the exchange rate.

The Official Reserve Account

The Official Reserve Account measures the change in value of a country's foreign assets. These assets include:

• Foreign currency (e.g., USD, Euro)
• Gold
• Reserve position at the IMF
• Special Drawing Rights (SDRs)

An increment of assets in the Official Reserve Account of a country results in debits (-) because they represent the purchase of foreign currency by the Central Bank, deposited offshore (an outflow of capital).

Factors Influencing International Trade Flows

• Cost of Labor
• Impact of Inflation
• Impact of National Income
• Impact of Government Policies:
  • Restrictions on imports
  • Subsidies for exporters
  • Restrictions on piracy
  • Labor laws
  • Business laws
  • Tax breaks
• Exchange Rates