Investment income is the maturity value the person receives in return for him money invested in stocks, bonds and debentures. It is added to current account but debitor to the capital when you invest in outside world. Let’s see the examples and meaning of Investment income.
Investors used to buy financial assets like stocks, bonds, mutual funds, expecting value of invested capital will grow over original amount over the period of maturity.
Or, to start business activities hoping to generate surplus profit is termed as investment. When such investment is made by a non-resident investors in the outside world it is labeled as foreign investment and investment income is the maturity value the person receives in return for him money.
International economic relations among nations
Nations do trade, investment, financial helps one another in opportunity or need. All the exchanges and transactions occurred among nations within a year is accounted as the summary of economic transactions in the each nation called ”Balance of payments”.
Whether it is inflow or outflow of goods and services or capital, donations, and remittance, all transactions that took place across the political borders in a year is placed in the current account and capital account in balance of payments.
Difference between current account and capital account
Current account monitors how much goods and services are traded with the outside world in a year. And how much investment income, remittance, gifts and donations are exchanged among countries. In other words, it accounts country’s trading activities and its net result.
On the other hand, how much capital, investment, loans, deposits are exchanged (inflow and outflow) between nation and outside world is accounted in the capital account of balance of payments. Especially, it includes portfolio investment and foreign direct investment, borrowing, NRI deposit etc.
Relationship between current and capital account
No nation could afford to invest in either portfolio investment or foreign direct investment in other nations unless its current account becomes surplus. Or, there is surplus fund to invest.
China, with its surplus current account managed to purchase US bonds. But, US has to balance its current account balance by the surplus capital account it received.
Though fund invested by the means of current account indicates debit either on capital or financial account of investing country, in return, it gets investment income credited to the current account from invested nations.
Foreign investment and investment income have huge impact in the today’s economically integrating world.
Notably, capital account surplus doesn’t mean that nation is creditor to the outside world but debitor as it has more liabilities than claims due to capital inflow from investors. Only foreign direct investment is non-debt investment but expect better profit in long run.
How to maximize foreign investment and investment income
Open economic atmosphere, better economic integration, lesser rules and regulations by government, free trade, are essential to cultivate the culture of foreign investment across the world.
It is utmost important to transfer expertise, technology, capital, skills to realize unrealized potential in the resources rich promising regions of poor countries.
Poverty alleviation, level playing field, high living standards, equitable development would be possible only if we would empower the spirit of investing.
Solved questions on the meaning of Investment income
To make the topic more simple, here are some useful solved questions on the meaning of Investment income.
Q.1. What does investment income mean?
Ans: Investment income is a constituent parts of current account in general and invisible trade account in particular.
Though fund invested by the means of current account indicates debit either on capital or financial account of investing country, in return, it gets investment income credited to the current account from invested nations.
Q.2. What would be the impacts of capital account?
Ans: Capital account surplus doesn’t mean that nation is creditor to the outside world but debitor as it has more liabilities than claims due to capital inflow from investors. Only foreign direct investment is non-debt investment but expect better profit in long run.
Currency market and convertibility
Investing in equities and bonds
Understanding capital formation
Visible and invisible trade balance