capital and financial accounts

• What does the Capital Account record?

  Small capital flows between countries
• Why is the Capital Account considered relatively inconsequential?

  Because it records small capital flows
• What is an example of a transaction recorded in the Capital Account?

  Debt forgiveness by the government towards developing countries
• How do capital transfers by migrants affect the Capital Account?

  They are recorded as migrants emigrate and immigrate
• What are the main components of the Capital Account?

  • Small capital flows between countries
  • Debt forgiveness by governments
  • Capital transfers by migrants during emigration and immigration
• What does the Financial Account record?

  The flow of all transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities
• What are the sub-sections included in the Financial Account?

  • Foreign Direct Investment (FDI)
  • Portfolio Investment
  • Financial derivatives
  • Reserve Assets
• What is Foreign Direct Investment (FDI)?

  Flows of money to purchase a controlling interest (10% or more) in a foreign firm
• How is money flowing in recorded in Foreign Direct Investment (FDI)?

  As a credit (+)
• How is money flowing out recorded in Foreign Direct Investment (FDI)?

  As a debit (-)
• What does Portfolio Investment involve?

  Flows of money to purchase foreign company shares and debt securities
• How is money flowing in recorded in Portfolio Investment?

  As a credit (+)
• What are financial derivatives?

  Sophisticated financial instruments used by investors to speculate and return a profit
• How is money flowing out recorded in Portfolio Investment?

  As a debit (-)
• How is money flowing in recorded in financial derivatives?

  As a credit (+)
• How is money flowing out recorded in financial derivatives?

  As a debit (-)
• What are reserve assets?

  Assets controlled by the Central Bank and available for use in achieving monetary policy goals
• What do reserve assets include?

  Gold, foreign currency positions at the IMF, and foreign exchange held by the Central Bank