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Honor Economics Practice Exam

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In the balance of payments, a large capital outflow from investors seeking to purchase foreign assets would be recorded in which account?
Correct Answer:
Capital/financial account
Explanation:
When investors move funds abroad to buy foreign assets, the movement is a cross-border financial transaction that changes ownership of financial assets and liabilities. This type of flow is recorded in the capital/financial account, which tracks capital movements and changes in financial claims between residents and non-residents. The current account covers trade in goods and services and income receipts, not asset purchases, so it wouldn’t capture this outflow. Official reserves would only be involved if the central bank actively intervened by buying or selling reserves, and the trade balance is a component of the current account, not the capital/financial account. So the large capital outflow to purchase foreign assets belongs in the capital/financial account.

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