How is the capital account distinct from the financial account?

The capital account differs from the financial account as it records non-financial assets and capital transfers, not investment flows.

The capital account and the financial account are both components of a country's balance of payments, which is a record of all transactions between the residents of a country and the rest of the world. However, they record different types of transactions. The capital account records transactions involving non-financial assets and capital transfers, while the financial account records investment flows.

The capital account includes transactions such as the sale and purchase of non-produced, non-financial assets like land and natural resources. It also includes capital transfers, which are transactions where a change of ownership of an asset does not occur. Examples of capital transfers include debt forgiveness and migrants' transfers. Debt forgiveness is when a country or organisation decides to cancel the debt owed by another country or organisation. Migrants' transfers are the net worth of migrants changing their residency.

On the other hand, the financial account records investment flows. This includes direct investment, portfolio investment, and other investments. Direct investment is when a resident of one country acquires a lasting interest in a company in another country. Portfolio investment involves transactions in equity and debt securities, but without a lasting interest in a company. Other investments include trade credits, loans, currency, and deposits.

In summary, while both the capital account and the financial account are part of a country's balance of payments, they record different types of transactions. The capital account focuses on non-financial assets and capital transfers, while the financial account is concerned with investment flows. Understanding the distinction between these two accounts is crucial for analysing a country's economic interactions with the rest of the world.