What are capital goods and intermediate products

Latin America Institute (LAI)

Balance of payments = current account + capital account

  1. Current account: The international economic transactions in the goods and services sector are referred to as exports or imports. This includes products such as cars, mangoes or computer software, as well as services, management consultancies or vacation trips. It is important that both end and intermediate products are included in the performance balance. In other words, it not only takes into account the cars that consumers ultimately drive, but also the steering wheels and seat cushions that go into the production of a car.

  2. Capital account: In the capital account, on the other hand, those transactions are included that do not represent end or intermediate products, but that have an investment character in the broadest sense. Such transactions could be broadly summarized as financial flows. These financial flows include a number of different transactions that need to be considered. Among the most important are the Portfolio investments. Another form of capital transaction that is relevant for us is foreign direct investment, the so-called FDI (Foreign direct investment). One speaks of an FDI when, as an investor, one does not simply invest in another country in the form of a portfolio investment, but rather when one is involved in capital goods oneself. In other words: with FDIs, in contrast to portfolio investments, there is always a transfer of knowledge and technology. Another very widespread type of financial transaction is the remittance of migrants who send parts of the money earned abroad to their families at home (also Remittances called).

The different economic structures of the two countries can be seen in the balance of payments in Germany and the USA. The German economy is very much oriented towards exports. Germany exports more goods and services than it imports, hence the current account surplus (green graph). In the course of this, foreign money flows in turn to Germany, with which the foreign country has to pay for German goods (hence the capital account deficit, blue graph). The current account deficit from the beginning of the 1990s can be traced back to the German reunification, since the current account of the new federal states was very deficit.

Financial and current account balances (Germany 1971-2010, in billion US dollars)

Source: OECD

The US capital and current account is a reflection of the situation in Germany. The strong private consumption in the USA leads to a large current account deficit (green graph) and correspondingly high capital exports (blue graph), since there are no exports of the same value for the import of goods from abroad and therefore capital has to be exported.

Financial and Current Account Balances (U.S. 1971-2010, billion U.S. dollars)

Source: OECD