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CAPITAL AND FINANCIAL ACCOUNT

Updated on February 29, 2012

The capital and financial account has two major components--the capital account and the financial account.The capital account measures the transfers of fixed assets (land, buildings, etc.) and items like debt forgiveness among nations when they are undertaken without payment or compensation. In 1998, the United States realized a favorable balance of $0.6 billion in the capital account.
Of greater significance for the United States is the financial account, which measures all international transactions of financial assets. Financial assets can be classified in a number of different ways, including the length of the life of the asset (its maturity), by nature of the ownership (public or private), or by the degree of control over assets or operations that the claim represents (portfolio, with no control, or direct investment, with some degree of control).
1. Direct investment:
This is the net balance of capital that flows out of and into the United States for the purpose of exerting control over assets. For example, if a U.S. firm either builds a new automotive parts facility in another country or purchase a company in another country. this would fall under direct investment. When the capital flows out of the United States (for example, Sony of Japan purchased Columbia Pictures in 1989), it is a capital inflow and enters the balance of payments positively. Whenever ten percent or more of the voting shares in a U.S. company are held by foreign investors, the company is classified as the U.S affiliate of a foreign company and a foreign direct investment. Similarly, if U.S investors hold ten percent or more of this control in a company outside the United States, that company is considered the foreign affiliate of a U.S. company . The United States experienced a surplus of $60.5 billion in direct investment in 1998.
2. Portfolio investment:
This is net balance of capital that flows in and out of the United States but that does not reach the ten percent ownership threshold of direct investment. If a U.S. resident purchases shares in a Japanese firm but does not attain the ten percent threshold, it is considered a portfolio investment (and in this case an outflow of capital). The purchase or sale of debt  securities (like U.S Treasury bills or bonds) across borders is always classified as portfolio investment. because debt securities by definition do not provide the buyer with ownership or lion for 1998, indicating that foreign citizens and financial institutions purchased more U.S. portfolio instruments than U.S citizens did of foreign investments.
3. Other investments:
This category consists of various bank loans extended by U.S resident banking operations as well as net borrowing by U.S. firms from financial institutions outside the United States. The net balance on other long-term capital in 1998 was a deficit $7.9 billion.

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