Current Account vs. Capital Account: Key Notes

Current Account vs. Capital Account: Key Notes

1. Overview

• The current account and capital account are the two main components of a nation's Balance of Payments (BoP).
• Current account: Tracks short-term transactions, net income, savings, and trade balance.
• Capital account: Records long-term assets and liabilities, capital inflows/outflows, foreign investments, and loans.
• Sum of current and capital accounts = 0: Surplus/deficit in one is offset by the other.

2. Current Account

• Deals with short-term economic transactions.
• Components:
  • Visible trade: Exports/imports of goods
  • Invisible trade: Exports/imports of services
  • Investment income: Dividends, interest, income from foreign assets
  • Unilateral transfers: Gifts, remittances
• Balance:
  • Surplus → Country is a net lender
  • Deficit → Country is a net borrower
• Economic insight: Indicates trade performance, income, and savings-investment gap.

Example:

• Exports = Credits, Imports = Debits in BoP.
• Trade balance affects the current account’s surplus or deficit.

3. Capital Account

• Tracks inflows and outflows of capital impacting foreign assets and liabilities.
• Components:
  • Foreign direct investment (FDI)
  • Portfolio investment
  • Loans and banking transactions
  • Changes in foreign reserves
• Balance:
  • Surplus → Inflow of money
  • Deficit → Outflow of money
• Divided by IMF into Financial Account and Capital Account.
• Records debt repayments, claims, and stock changes.

Government accounting context:

• Capital assets include buildings, infrastructure, and public facilities.

4. Major Differences: Current vs. Capital Account

5. Key Takeaways

• Current account shows income and trade performance.
• Capital account reflects capital movement and asset-liability changes.
• Both accounts together give a complete picture of a country’s international economic position.
• Understanding both helps in policy-making, economic forecasting, and international trade analysis