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Capital Outflow : An Overview

Dec 26, 2015 11:06 IST

    Capital Outflow describes undesirable condition of flowing out capital of the running economy. It can be caused by any number of economic or political reasons. It occurs when foreign and domestic investors sell off their assets/property in a particular country due to lack of investment safety and reaches to another country. It is recorded as negative, or a debit in the balance on capital account.

    Net capital outflow is the net flow of funds that are invested in abroad by a country. It is the prime factor to determine the financial & economic interaction with rest of the world. An open economy can buy and sell assets in financial markets to generate capital flows.

    NCO = Acquisition of foreign assets by residents – Acquisition of domestic assets by nonresidents

    A positive net outflow represents the more money invested by a country outside its boundaries than other countries invests in itself. When it is negative, Foreigners are purchasing more domestic assets. Disequilibrium in NCO represents the imbalance in trade.
    For instance, suppose a country is facing trade deficit then it must be financing the net purchase of goods and services by selling its assets abroad. Whereas if it is facing trade surplus then it is the indication of foreign money excess which is used for buying assets from abroad. Above statements reflects the relation between net capital outflows and net exports. It can be better comprehended with the following equation: -

    Savings=Domestic Investment + Net Exports = Domestic investment + Net capital outflows

    Here following situation stood for the corresponding conditions,

    Trade surplus,           exports>imports (Net exports>0 implies NCO>0)

    Balanced Trade,        exports=imports (Net exports=0 implies NCO=0)

    Trade deficit,             exports<imports (Net exports<0 implies NCO<0)

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