Difference between Current Account and Capital Account

This article will help you to learn about the difference between current account and capital account.

Difference between Current Account and Capital Account

The balance of payment comprises two accounts: Current Account and Capital Account.

Simply put current account records exports and imports of goods; exports and imports of services; and unilateral transfers.

As against it, capital account records transactions relating to purchase and sale of foreign assets and foreign liabilities during a year. All items of a flow nature are included in the Balance of Current Account and all items expressing changes in stocks are included in the Balance of Capital Account.

Again, current account deals with currently produced goods and services as against capital account which deals with payments of debts and claims.

(a) Current Account:

The current account of BOP account is that account which records imports and exports of goods, services and unilateral transfers during a year. Alternatively, it records sources (credit) and uses (debit) of foreign exchange on account of flow of goods, services and transfer incomes. It relates to all activities which do not alter the values of assets and liabilities of a country. Current account deals with real and short-term transactions.

These are called actual transactions as they affect income, output and employment of a country through transfer of goods and services. Thus, balance of current account can be estimated as the sum total of balance of trade. The main items (or components) of current account of BOP are:

Components of Current Account:

(i) Export and import of goods (Visible trade)

(ii) Export and import of services—non-factor and factor services (called Invisible trade)

(iii) Unilateral transfers (Transfer receipts/payments)

(iv) Investment income (Factor income from land, bonds, shares abroad)

(b) Capital Account:

The capital account of BOP records all such transactions between residents of a country and the rest of the world which relate to purchase and sale of foreign assets and liabilities during a year. In short, it is a record of inflows and outflows of capital which brings a change in a country’s foreign assets and liabilities. Capital account flows consist of investments, loans, commercial borrowings, banking, capital, etc.

Components of Capital Account:

Various forms (items) of capital account transactions are given below:

(i) Foreign Investment:

This refers to investment to and from the Rest of World. Investment may be direct or portfolio, (a) Direct investment means purchasing an asset and acquiring control of the same, e.g. purchase of a house abroad, (b) As against it, portfolio investment means acquisition of an asset that does not give control over asset, e.g. purchase of a bond issued by a foreign government.

(ii) Foreign Loans:

These refer to credit granted by foreign governments and international institutions like IME External commercial borrowings are also included.

(iii) Banking Capital and Other Capital:

Banking capital includes foreign assets and foreign liabilities of banking sector excluding the central bank. Deposits by non­residents are also included.

(iv) Monetary Movements or Changes in Foreign Exchange Reserve:

This reserve keeps on changing depending upon the net balance of other private and official transactions.

Mind, sum of current account and capital account should be zero. A deficit (or surplus) on current account is always matched by an equal surplus (or deficit) in capital account.

In conclusion, we can say that the Current Account is that part of Balance of Payment Account which shows all payments made or received in respect of goods and services including payment of interest on past lendings and borrowings. Capital Account is that part of BOP Account which shows all payments made or received by way of settling old debts or creating new debts.