Why is NX equal to NCO?

Net exports (NX) and Net Capital Outflow (NCO) measure a type of imbalance in a world market. NX measures the imbalance between a country's exports and imports in world markets for goods and services. NCO measures the imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners in world financial markets.

For an economy, NX should equal NCO. Every international transaction involves exchange. When a seller country transfers a good or service to a buyer country, the buyer country gives up some asset to pay for the good or service. Thus, the net value of the goods and services sold by a country (net exports) must equal the net value of the assets acquired (net capital outflow).

For example, when the US runs a trade deficit (i.e. Imports> Exports), it is bying more goods grom abroad than it is selling to foreigners. This deficit is matched by a capital account (NCO) surplus of equal size. That is, foreigners use the dollars that are not used to buy US goods and services to purchase US assets such as bonds, stocks, etc. Put another way, we can say that when we buy goods or services from foreigners (i.e. imports), we have to give to foreigners in exchange either goods and services (exports) or else assets like the ownership of US real estate or companies or IOUs such as bonds.