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What are Capital Flows?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 October 2016
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Capital flows is a term used to describe the movement or flow of money as it relates to activities such as investing, trading goods and services, or the operation of a business enterprise. The term is often used to describe internal processes within a business that involve purchasing necessary equipment and materials, as well as the costs associated with the research and development of new business opportunities. Governments are also concerned with various types of capital flows, as the movement of the money supply within the economy is an important indication of the current health status of that economy.

Within businesses, assessing capital flows often takes the form of looking closely at various types of capital expenditures. This may involve analyzing the use of funds set aside as investment capital, as well as the rate that the capital is being invested. Evaluating the flow of money also involves looking closely at how funds are spent on various types of operational expenses, and determining if the return justifies the amount of money spent. The same is true with research efforts; if those efforts are leading to the development of goods and services that will ultimately yield a return for the business, then the flow of cash into those efforts is considered a smart move.

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With governments, there is often the need to break down capital flows into several measurable streams. This makes it easier to assess how the overall money supply within the economy is moving, where it is in turn triggering additional movement of money in various economic sectors. A few examples of the streams or classes that many nations will watch closely include the amount of venture capital that is being invested in new businesses, the ebb and flow in mutual funds, and movements between different classes of capital, such as cash to stocks, stocks to bonds, and similar combinations. One of the major areas where governments pay attention to capital flows is within the operation of the national government, as that capital is used to purchase necessary goods and services, and as cash moves from one department or agency to another.

Overall, capital flows are valuable in understanding where the money is going and that it is producing beneficial results as a result of that movement. Should an assessment of capital flows indicate that the desired goals are not being achieved with the current flow of capital, adjustments can be implemented to move the money flow in a direction that is considered more productive and ultimately in the best interests of everyone involved.

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