Final answer:
The cash resulting from the sale or exchange of an investment is classified as principal cash. This is because it represents the return of the investment value itself, different from income cash which includes dividends or interest. Principal cash reflects the original invested capital, not the income generated from it.
Step-by-step explanation:
When it comes to the sale or exchange of an investment, the cash resulting from such a transaction is typically classified as principal cash. This classification is based on the notion that the original capital amount or the value of the investment itself is being returned or realized, rather than generating income from the asset. The difference between income cash and principal cash lies in the cash flow: income cash refers to the payments received as a result of owning the investment, such as dividends or interest, while principal cash involves the return of the invested capital itself.
Income payments, as part of the current account balance, represent financial transactions involving the flow of money into and out of a country, such as funds received by U.S. investors from foreign investments and payments to foreign investors from investments in the U.S. These transactions are regarded as part of the international trade of financial capital. Conversely, with the sale of an investment, the focus is on the recovery of the investment's worth, making it principal rather than income.