What is the determinants of capital account.?
It is very important to divide the capital account into at least two components. The first is portfolio investment. This is investment that flows in and out of countries for the sole purpose of saving. Examples would be buying foreign stocks and bonds or putting funds in a foreing bank. Portfolio investment is motivated mostly by interest rates. If the interest rate in France is higher than in the US, then portfolio investment in France will tend to increase. The second category is direct investment. This type of investment occurs when an investor actually buys substantial assets in a foreign country — land, factories, or distribution networks. This is very different, because the investor has a long-term stake in the country. In addition, to the rate of return, the investor is also thinking about how the purchase will complement their other investments. For example, a German car manufacturer might buy a distributorship in the US to increase its US sales.
