Capital account and current account are the two key elements of the ‘Balance of Payments’ (BoP), which records a country’s economic transactions with other countries over a period of time. Capital account records changes in the capital of the economy due to capital receipts and expenditure whereas current account records all the inflow and outflow of funds to and from the country for a specific period resulting from trading products and services and other income. This is the key difference between the capital account and current account.
CONTENTS
1. Overview and Key Difference
2. What is a Capital Account
3. What is a Current Account
4. Side by Side Comparison – Capital Account vs Current Account
5. Summary
What is Capital Account?
Capital account includes the cash flows resulting from capital receipts and expenditure. These are investments made by both private and public companies.
Components of Capital Account
Foreign Direct Investment (FDI)
FDI refers to a business in one country making an investment or acquiring control in another business situated in a different country. Many popular multinational firms such as Coca-Cola, Unilever and Nestlé have invested in countries through FDI. Read more about FDI.
Portfolio Investment
Investment in stocks, bonds, debts and other financial assets
Government Loans Granted for Other Nations
Some countries give out loans to other nations in the form of foreign aid. For instance, Forbes magazine stated that in 2014, USA has granted Financial Aid to 96% of all countries. Read more: Difference Between FDI and Portfolio Investment.
What is Current Account?
This account records all the fund inflows and outflows relating to the trading of products, services, and other incomes. Current account also indicates the comparative advantage the country has over others since it provides an important yardstick of the status of international trade.
Components of Current Account
Balance of Trade
This is also synonymized as ‘commercial balance’ or ‘net exports’. This amounts to the difference between the incomes earned through country’s exports and imports. If the country’s value of exports is greater than the value of imports, it is referred to as a ‘trade surplus’ while a ‘trade deficit’ is a state where the country is importing more products than its exports. Read more: Balance of Trade (BOT)
Trading of Services
This refers to the services received from other countries and rendered to other countries.
Net Investment Income
This is the income from foreign investment less payments on foreign investments.
Net Cash Transfers
This is the current transfers in the form of donations, gifts, and aids.
Figure 1: Balance of trade indicates the difference between exports and imports in a country.
What is the difference between Capital Account and Current Account?
Capital Account vs Current Account |
|
| Capital account includes the cash flows resulting from capital receipts and expenditure. | Cash flows that result from trading products, services, and other incomes are recorded in the current account. |
| Purpose | |
| The purpose of capital account is to indicate the utilization of capital. | Current account deals with receipts and payments of cash and other non-capital items. |
| Compositions | |
| Capital account includes foreign direct investment, portfolio investment, and government loans. | Current account contains balance of trade, trading of services, net investment income and net cash transfers. |
Summary – Capital vs Current Account
Both capital and current account are key components in the balance of payments, and thus, are very important for the economy of the country. The difference between capital and current account lies in the type of financial results recorded; while capital account records financial results from capital receipts and expenditure, current account reports the cash flow from trading activities. Both these accounts help to provide insights of the size, direction and composition of international trade in a country.
Reference:
1.”What’s the difference between the current account and the capital account?” Investopedia. N.p., 16 Mar. 2015. Web. 07 Mar. 2017.
2.”U.S. Gives Financial Aid to 96% of All Countries.” Forbes. Forbes Magazine, 15 Oct. 2014. Web. 07 Mar. 2017.
3. Kumar, Vinod. “Difference Between Current Account And Capital Account.” Accounting Education. N.p., 24 Nov. 2009. Web. 07 Mar. 2017.
4. Pettinger, Tejvan. “The effect of a current count surplus.” Economics Help. N.p., n.d. Web. 07 Mar. 2017.
Image Courtesy:
1. “Trade balance Iran”By SSZ – Own work (CC BY-SA 3.0) via Commons Wikimedia