What Is the Capital Account? Measurement and Examples
How Trademarks, Copyrights and Drilling Rights Are Added to GDP
The capital account is part of a country's balance of payments. It measures financial transactions that don't affect a country's income, production or savings.
These transactions are all non-produced, nonfinancial assets. They might produce an investment stream in the future. In that case, they would be included in the financial account. They might eventually produce income from goods or services.
When that happens, they would be counted in the current account.
In the United States, the Bureau of Economic Analysis measures capital account transactions. The capital accounts transactions are difficult to measure. They don't show up in the BEA's regular reports. That's because these transactions are large and irregular. When they do show up, the BEA puts them in the capital account. That’s so they don't affect the gross domestic product or the gross national product reports.
The capital account includes international transfers of ownership. A great example is when a U.S. company purchased a foreign trademark. It doesn't immediately produce a product or income. A similar example is if a U.S. oil company bought drilling rights to an overseas location.
Another example is a foreign purchase of a U.S. copyright to a song, book or film. International debt forgiveness is another example.
A cross-border insurance payment could be very large, but it only occurs occasionally. Therefore, it goes into the capital instead of the current account.
The capital account is divided into two main subaccounts:
1. Acquisition and Disposal of Non-produced, Non-financial Assets: This measures the purchase and sale of two types of assets: tangible and intangible assets.
Tangible assets include the rights to natural resources, such as mineral rights, electromagnetic spectrum and offshore drilling rights.
Intangible assets include patents, copyrights and trademarks. They also include franchises and leases. An example is the receipts of United States-based sports leagues to establish franchises in Canada. It also includes U.S. State Department receipts for the sale of land in London. Another example is payments made to buy the rights to negotiate with foreign athletes.
The BEA admits there is no reliable way to measure the separate value of most of these transactions. Often they are mixed up in royalties and license fees, in the net income section of the current account. Or, they could be tied to the business, professional or technical services accounts in the trade portion of the current account. (Sources: "Balance of Payments," New York Federal Reserve Bank. "Capital Account," Bureau of Economic Analysis.)
2. Capital Transfer: There are three components of the capital transfer sub-account. The first is insured catastrophic losses. These are usually large, but infrequent, insurance payments from foreign insurance companies. The BEA determines on a case-by-case basis if it counts as a catastrophic loss.
The second component of this sub-account is debt forgiveness. The only part of the debt that is measured is the principal and any overdue interest payments. Future interest payments that haven't accrued aren't counted. Usually, the only data available is for the debt forgiven by a country's government, such as U.S. Treasury notes.
The third component is specific to the transfer of the U.S. government's assets in the Panama Canal Commission to the Republic of Panama.
Acquisitions of non-produced, non-financial assets create a deficit in the capital account. An example is the purchase of rights to natural resources. When a country's residents, businesses or government forgive a debt, that also adds to the deficit.
Disposals of non-produced, non-financial assets create a surplus. An example is the sale of rights to natural resources.
Also, when foreign insurance companies pay to cover catastrophic losses, that adds to the surplus.
How the Capital Account Is Part of the Balance of Payments
The other two parts of the balance of payments are the financial account and the current account. The financial account measures the net change in ownership of foreign and domestic assets. The current account measures the international trade of goods and services plus net income and transfer payments.
The capital account is kind of a miscellaneous account. Combined with the financial account, it represents the transfer of capital to help pay for the current account, which includes the trade of goods and services.
The capital account is usually not very large. But when combined with the financial account, it could run a large enough surplus to offset a trade deficit. Unfortunately, that means the country is selling off its assets to buy foreign goods and services.
- Current Account
- What Is a Current Account Deficit?
- Trade Balance
- Capital Account
- Financial Account