Financial account balance

From Hobson's Choice

The Financial account balance refers to (net) international transactions in financial assets, such as overseas sales of securities and bank loans from overseas institutions. It is one of the three fundamental components of the balance of payments identity:

In the equation above, NKT is the standard IMF acronym for financial accounts, CAB is the current account balance, NPNNA is what is now called the "capital account balance," and "errors and omissions" is equal to 0 minus the older expression, "balance of payments" (BoP). Formerly, the term "capital account" referred to international transactions in assets (finance capital). Following IMF practice, this site uses the term "financial account balance" for that. The IMF uses NKT (from net capital transfers) as shorthand for financial accounts, and NPNNA (from "net purchases of nonproduced, nonfinancial assets") for capital accounts.^[1]

Contents 1 Explanation 2 Capital Account and FFI 3 Notes 4 See Also 5 External Links

Explanation

The financial account balance includes portfolio investment and foreign direct investment (FDI). Portfolio investment consists of foreigners buying stocks or bonds in domestic corporations. FDI includes non-securitized commercial stakes, such as a venture capitalist supplying the finance capital for a startup. When we speak of net capital inflows, we are subtracting domestic investment in ventures overseas from foreign investment in ventures located domestically.

US FINANCIAL ACCOUNTS from balance of payments outline (millions of $) (credits +, debits -)
Line #	Category	Value
40	US assets abroad (incr./financial outflow)	-106
41	US official reserve assets	-4,848
46	US government assets	-529,615
50	US private assets	534,357
51	Direct investment	-332,012
52	Foreign securities	60,761
53	US claims reported by US non-banks	372,229
54	US claims reported by US banks	433,379
55	Foreign assets in the US (increase/financial inflow)	534,071
56	Foreign official assets in US	487,021
63	Other foreign assets in US, net	47,050
64	Direct investment	319,737
65	US treasury securities	196,619
66	US securities other than t-bills	-126,737
67	US currency	29,187
68	US liabilities reported by US non-banks	-45,167
69	US liabilities reported by US banks	-326,589

Capital Account and FFI

Foreign factor income (FFI) is the sum of all factor payments to the owners of productive factors (such as land, labor, and capital). Residents of any nation A will own factors that are present in B, and vice versa. An interesting corollary to this is that foreign factor income may be represented as

FFI =

where r represents the rate of return on capital, and δ = the rate of depreciation. Since the index of time (is negative, i.e., we are expressing "ten years ago" as -10, -t will always be a positive number. Assuming the rate of depreciation is 5% per year, capital investment that is ten years old will have a value of 60% its initial value.

As with the other components of the CAB, there is income flowing abroad and income flowing inward. FFI is the net influx, which may well be negative.

Notes

1. ↑ Balance of Payments Manual Fifth Ed., , International Monetary Fund (1993), pp.21, 48, & 81.

See Also

balance of payments
capital account balance (NPNNA)
current account balance (CAB)

External Links

• Statistics on the US capital account balance may be found at the Treasury Department website.
• Bureau of Economic Analysis, International Economic Accounts (statistics)

James R MacLean (13:30, 11 October 2007 (PDT))