www.informedtrades.com/24711-capital-account-measuring-capital-flows.html

The basic formula for calculating the capital account is: Increase in Foreign Ownership of Domestic Assets (things such as real estate, cross boarder M&A, and Investments by Foreign Companies in local operations) - Increase in Domestic Ownership of Foreign Assets + Portfolio Investment (things such as stocks and bonds) + Other Investment (things such as loans and bank accounts).

As with the current account it is for our purposes not important to understand all the intricate details of the capital account, but simply that where the current account measures money flowing in and out of a country as a result of trade flows, the capital account measures money flowing in and out of the country as a result of capital flows.

As we discussed in our lesson on capital flows, when a market in a country is outperforming the markets in other areas of the world, money will flow into the country from foreigners seeking to participate in those out sized returns. These capital flows are reflected in the country's capital account. This is the case whether we are talking about a country's stock market, bond market, real estate market etc.

As a quick example lets say that a mutual fund located in the United States invests $1 Million Dollars in the Canadian Stock Market, and a Canadian real estate firm buys the equivalent amount of real estate in the United states. Just for simplicities sake, if these were the only transactions that took place between these two countries and any other country, the Capital Account for both the United States and Canada would show a balance of zero, as the two transactions would have exactly offset themselves.

As with the current account when a country sees strong inflows or outflows of capital, this has a direct affect on its currency. When there are significant inflows this creates demand for the currency, pushing the value of the currency up, all else being equal. Conversely, when there are significant outflows, this creates a market supply of the currency, pushing its value down all else being equal.

As you may be able to tell by now, it is the interaction of both the current account and the capital account that fundamental traders focus on, as it is the imbalances here that theoretically cause the value of a currency to rise and fall over the long term. This will be the topic of our next lesson so we hope to see you then.

1. An Overview of the Forex Market
2. The Difference Between Over the Counter (OTC) and Exchange-Based Markets
3. Who Really Controls the Forex Market?
4. The Role of the Retail Forex Broker
5. How Central Banks Move the Forex Market
6. How Banks, Hedge Funds, and Corporations Move Currencies
7. A Breakdown of the Forex Trading Day
8. Forex Trading - Characteristics of the Main Currencies
9. Setting Up Your Forex Trading Software
10. Forex Trading - How to Read a Currency Quote
11. Forex Trading - Understanding Currency Rate Movements
12. Forex Trading - Understanding the Bid/Ask Spread
13. How to Place Your First Forex Trade
14. How to Determine Your Position Size in the Forex Market
15. Forex Trading - Pips and Fractional Pip Pricing
16. How to Calculate Forex Trading Profits and Losses
17. An Introduction to Leverage in Trading
18. How Trading on Margin Works
19. How to Calculate Leverage in the Forex Market
20. How to Calculate Leverage in the Forex Market Part 2
21. How to Place a Market Order in the Forex Market
22. How to Place a Stop Loss and Take Profit Order in Forex
23. How to Place A Pending Entry Order in the Forex Market
24. How Rollover Works in Forex Trading
25. How Rollover Works in Forex Trading Part 2
26. Free Forex Charts Userguide
27. What Moves the Forex Market? - Trade Flows
28. How Capital Flows Move the Forex Market
29. The Current Account: How Forex Traders Can Use it to Identify Opportunities
30. Interpreting the Capital Account and Measuring Capital Flows
31. Fundamentals that Move Currencies - Balance of Payments
32. How Interest Rates Move the Forex Market Part 1
33. How Interest Rates Move the Forex Market Part 2
34. How To Trade the Carry Trade Strategy Part 1
35. How To Trade the Carry Trade Strategy Part 2
36. How To Trade the Carry Trade Strategy Part 3
37. Fundamental Analysis Vs. Technical Analysis in Forex
38. Forex Trading Fundamentals Quiz - Test Your Knowledge
39. Why the US Dollar is Still King
40. Determining the Fate of the US Dollar
41. Determining the Fate of the US Dollar Part II
42. Determining the Fate of the US Dollar, Part III
43. Economic Releases that Move the US Dollar
44. A Trader's Introduction to the Euro
45. A Trader's Introduction to the Euro, Part II
46. A Trader's Introduction to the Euro, Part III
47. A Trader's Introduction to the Yen
48. A Trader's Introduction to the Yen, Part II
49. A Trader's Introduction to the Japanese Yen, Part III
50. A Trader's Introduction to the British Pound
51. A Trader's Introduction to the Swiss Franc
52. A Trader's Introduction to the Canadian Dollar
53. A Trader's Introduction to the Australian Dollar
54. A Trader's Introduction to the New Zealand Dollar
55. Why Choosing a Forex Broker is so Confusing
56. Choosing a Forex Broker: Regulation and Financial Stability
57. Choosing a Forex Broker Part III: Transaction Costs
58. Choosing a Forex Broker, Part IV: Technology & Add-ons
59. Choosing a Forex Broker: Evaluating Customer Service
60. An Introduction to Forex Capital Markets (FXCM)
61. An Introduction to DailyFX Plus

This 61-video series is an introduction and in-depth look at the forex market, including how to place trades, the fundamentals of the forex market, profiles of the main currency pairs, and factors to consider when choosing a forex broker.



This is a continuation of The Basics of Trading course by Informed Trades.