What does it mean for a country to experience a capital inflow? Is thi

What does it mean for a country to experience a capital inflow? Is this associated with a surplus or a deficit on the country’s capital account?

What will be an ideal response?

ANSWER

Answer: When a country experiences a capital inflow, foreign residents are investing in domestic assets and domestic residents are selling foreign assets. These transactions are credits on the balance of payments because the country is effectively exporting assets. If capital inflows exceed capital outflows, there is a surplus on the country’s capital account. This surplus would be offsetting a combined deficit on the current account and the official settlements account.