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Financial Definition of CAPITAL ACCOUNT
What It Is
A capital account is a national account that shows the changes in a nation's assets. These assets can be physical or financial.
How It Works
The capital account essentially is the left-hand side of a country's balance sheet, because it measures all of the physical and financial assets the country owns. Capital accounts are an important part of national accounting, which is a method of calculating the economic activity of a country or region.
The goal of the capital account and the national accounting system it feeds is to summarize the whole economic picture. Accordingly, the markets watch this information closely because it often signals the overall direction of an economy and thus can provide buy and sell signals for a variety of industries or portfolio strategies.
Why It Matters
The country's balance of trade is part of its balance of payments, which is actually composed of three subaccounts in the United States: the current account, the capital account, and the financial account, each of which have their own types of inflows and outflows.
The objective is to help economists and analysts understand the strength of a country's economy in relation to other countries. For example, a country with a large trade deficit is essentially borrowing money to purchase goods and services, but a country with a large trade surplus is essentially doing the opposite. In some cases, the balance of trade correlates with the country's political stability because it is indicative of the level of foreign investment occurring there.
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