Iceland could experience an autonomous increase in its
capital account surplus only if there was a counterpart induced increase in its current account deficit.
Martin Feldstein (2006) criticizes the analysis in Chapter 6 of that report, "The
Capital Account Surplus," for attributing the inflow of capital to the United States to private sector investors attracted by high earnings of U.S.
In the third quarter of 2003, however, those inflows dropped off to the point of almost ceasing: only US$590 million was repatriated, an important part of the explanation as to why the
capital account surplus turned into a deficit in the third quarter.
Arithmetically, the company has a current account deficit and a
capital account surplus, and thus has an "imbalance." Whether the company is suffering from an economic imbalance depends on the productivity of its capital investments.
In national income accounting, the quantity [Mathematical Expression Omitted] is known as the
capital account surplus, or the amount of foreign investment in the domestic economy.
Domestic output is AB, and the current account deficit, and
capital account surplus (P above) is the quantity BC.
The increase in cross border investment inflows to a country has led to an increase in the price of its currency, and to higher prices for its securities, which were an integral part of the adjustment process to ensure that there was an induced increase in the country's current account deficit that corresponded to the autonomous increase in its
capital account surplus. The country's currency became increasingly overvalued and led to massive distortions in the relationship between domestic costs of production and costs of production of similar goods in foreign markets.
