Capital Account, How It's Measured, with 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 affect a country's future income, production, or savings. An example is a foreigner's purchase of a U.S. copyright to a song, book, or film. Its value is based on what it will produce in the future. The Federal Reserve calls these transactions non-produced, nonfinancial assets.
When these transactions generate income, they are transferred to another part of the balance of payments. If they produce investment income, they are transferred to the financial account. If they produce income from goods or services, they are transferred to the current account.
In the United States, the Bureau of Economic Analysis measures capital account transactions. The capital accounts transactions are large and irregular. They are difficult to measure because they don't show up in the BEA's regular reports.
The capital account includes international transfers of ownership. An example is a purchase of a foreign trademark by a U.S. company. A similar example is a U.S. oil company’s acquisition of drilling rights to an overseas location.
International debt forgiveness is another. A cross-border insurance payment could be substantial, but it rarely occurs. When it does, it goes into the capital account.
The capital account has 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, parts of the 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. In the net income section of the current account, they are often mixed up in royalties and license fees.
They could also be tied to the business, professional, or technical services accounts in the trade portion of the current account.
2. Capital Transfer. There are three components of the capital transfer sub-account. The first is insured catastrophic losses. These are 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. The only data available is on 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, their action 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. When foreign insurance companies pay to cover catastrophic losses, they also add 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 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.
Balance of Payments
- Current Account
- Capital Account
- Financial Account