What does the capital account measure?

The capital account measures the buying and selling of assets between countries. This account is part of a country's balance of payments and focuses specifically on transactions that involve ownership of international assets and liabilities. When a country invests in another country—whether through foreign direct investment, portfolio investment, or the purchase of real estate—it is reflected in the capital account.

The capital account operates alongside the current account, which records trade in goods and services, and reflects the overall financial position of a country in relation to its international investments. The capital account not only includes the purchase and sale of physical assets like property but also encompasses stocks, bonds, and other financial instruments, highlighting the cross-border flow of capital.

In contrast, the choices that pertain to the balance of trade in goods and services or the exchange of currency between firms focus on different economic aspects that do not directly involve capital transactions. Furthermore, foreign aid and grants are typically recorded in the current account, not the capital account, as they represent transfer payments rather than an exchange of assets. Thus, the correct answer accurately captures the essence of what the capital account measures in the context of international economics.