Principles of Macroeconomics / Unit 7 MAC 0607 worked example, 60 to 90 seconds
In or Out?
The idea
To say which way capital moves, ask who ends up owning a claim on whom. If a foreigner acquires an asset here, whether a bond, a building or a share of a company, capital has flowed in. If a resident acquires an asset abroad, capital has flowed out. Then check the sign against the current account: a country with a current account deficit has, on net, capital flowing in, because that is how the deficit is paid for. Gross flows go both ways at once; only the net direction is fixed by the current account.
In practice
Worked example: a foreign pension fund buys government bonds here, which is capital in. A domestic company builds a factory abroad, which is capital out. A foreign firm buys a local business, capital in. A resident buys shares on a foreign exchange, capital out. A country doing all four at once still has a net direction, and it matches its current account.
Where people slip
Capital flowing in is not the same as money arriving as a gift. It arrives as a claim, and claims are repaid with interest or dividends, which is why the income component of the current account grows as past borrowing accumulates.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Builds on
Unlocks
- Nothing yet depends on this.
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics