How is net capital outflow calculated?

Net capital outflow is calculated as the difference between the purchases of foreign assets by residents and the purchases of domestic assets by foreigners. This reflects the flow of capital, indicating whether residents are investing more in foreign assets or if foreigners are investing in domestic assets.

When residents purchase foreign assets, it signifies an outflow of capital from the domestic economy to other countries. Conversely, when foreigners purchase domestic assets, it represents an inflow of capital into the domestic economy. Thus, by subtracting domestic asset purchases by foreigners from foreign asset purchases by residents, you can quantify the overall net capital flow. If the result is positive, it indicates a net outflow, meaning that the country is investing more abroad than it is attracting from foreign investments.

Understanding this concept is crucial as it relates to how capital moves across borders, influencing exchange rates, balance of payments, and overall economic health of a country.