International economics

Table of Contents

1. Topic pack - International economics - introduction
2. Section 3.1 International trade (notes)
3. Section 3.1 International trade (questions)
4. Section 3.1 International trade - simulations and activities
5. Section 3.2 Exchange rates (notes)
6. Section 3.2 Exchange rates - questions
7. Section 3.2 Exchange rates - simulations and activities
8. Section 3.3 Balance of payments - notes
   1. BOPs - introduction
   2. Credits and debits
   3. Current account
   4. Capital account
   5. Financial account
   6. Relationship between accounts
   7. Balance of payments - calculation
   8. Current account & floating exchange rate
   9. Current account & fixed exchange rate
   10. Balance of payments problems
   11. Consequences of deficit / surplus
   12. Policies to correct a balance of payments disequilibrium
   13. Consequences of a financial account deficit / surplus
   14. Marshall-Lerner condition
9. Section 3.3 Balance of payments - questions
10. Section 3.4 Economic integration - notes
11. Section 3.4 Economic integration - questions
12. Section 3.5 Terms of trade - notes
13. Section 3.5 Terms of trade - questions
14. Print View

Capital account

Syllabus: Explain the two components of the capital account, specifically capital transfers and transaction in non-produced, non-financial assets.

First I have to point out that this is probably the most confusing account of the 3 accounts. If you Google capital account you will find all kinds of explanations ranging from the non-understandable jargon infested accountant type explanations to the just plain silly. The IB try to help by stating they expect you to know and understand:

Capital account

• Capital transfers

• Transactions in non-produced, non-financial assets

So keeping things simple (as per the IB)

Capital transfers

 A transfer is a payment that is not made in exchange for anything. Basically, a gift.  You’re not getting a good or service for it, and you’re not making it to be released from an obligation, like with an interest payment on a loan.
Therefore:
The capital account is a relatively small element of the balance of payments. It includes capital transfers, such as debt forgiveness and migrants' transfers (someone emigrates they take assets with them; someone migrates into the country they bring assets with them).

Transactions in non-produced, non-financial assets are the rights to natural resources (pieces of land, water,  and the sales and purchases of intangible assets, such as patents, copyrights, trademarks, franchises and leases. They might produce an income stream in the future, in which case this 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. Many of the items in the capital account may not have a large value. For this reason, the capital account is usually smaller than the current or financial accounts.

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 Brazilian 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.

Explain the three main
components of the financial
account, specifically, direct
investment, portfolio
investment and reserve assets.Explain the three main
components of the financial
account, specifically, direct
investment, portfolio
investment and reserve assets.Explain the three main
components of the financial
account, specifically, direct
investment, portfolio
investment and reserve assets.International debt forgiveness is another example.