EECS 1520 Lecture Notes - Lecture 16: Portfolio Investment
21 Jun 2018
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EECS 1520 Lecture 16 Notes
Introduction
Other Capital Investment
A third component of the financial account consists of other capital investment, which
represents transactions involving short-term financial assets (such as money market
securities) between countries.
In general, direct foreign investment measures the expansion of firms’ foreign
operations whereas portfolio investment and other capital investment measure the net
flow of funds due to financial asset transactions between individual or institutional
investors.
Errors and Omissions and Reserves
If a country has a negative current account balance then it should have a positive capital
and financial account balance.
This implies that, although it sends more money out of the country than it receives from
other countries for trade and factor income, it receives more money from other
countries than it spends for capital and financial account components such as
investments.
In fact, the negative balance on the current account should be offset by a positive
balance on the capital and financial account.
However, the offsetting effect is seldom perfect because measurement errors can occur
when attempting to measure the value of funds transferred into or out of a country.
For this reason, the balance-of-payments account includes a category of errors and
omissions.
Growth in international trade
The United States has benefitted from international trade.
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