Differences Between Current Account vs Capital Account
Current Account vs Capital Account – If you want to understand the detailed account of the balance of payments, it is important that you understand current account and capital account.
Since no country alone is sufficient to provide for itself, most countries in the world import goods from other countries to meet the need of the countrymen and women. The balance of payments means the balance between exports and imports of a country. If a country exports more than it imports, then it would be a balance of payment surplus. On the other hand, if a country imports more than it exports, it would be a balance of payment deficit.
We talked about the balance of payment in brief because without that it would be impossible to understand current and capital account. Because current account and capital account are the crucial two key elements of the balance of payments other than financial account.
- Current account records all the trading related fund inflows and outflows. It includes trading of services, goods, products, miscellaneous expenses, and other incomes as well.
- Capital account, on the other hand, is much bigger than the current account; because it deals with capital investments and expenditures and it also includes investments made by public and private companies.
In this article, we will go through a comparative analysis of the current vs capital account.
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Current Account vs Capital Account Infographics
There are many differences between current account vs capital account. Let’s have a look at the top differences between them –
Current Account vs Capital Account – Key differences
As you already know current account and capital account are major two components of balance of payments. And there are many differences between them. Let’s look at the key differences between current account vs capital account –
- Current account is the sum-total of the net balance of export and import and the net income & direct transfer. Capital account, on the other hand, is the sum-total of non-financial assets acquired/disposed of, insurance received from foreign insurance companies for catastrophic losses, and debt forgiveness.
- Current account is used for trade affairs. Capital account, on the other hand, is used for miscellaneous affairs. That means capital account gets combined with either current account or financial account to be of any value.
- Current account is used pretty regularly and the amount is usually small to medium. Capital account, on the other hand, is used very infrequently and the amount of capital account is usually large but not very large.
- Current account deals with exports and imports of a country. Capital account deals with the assets, capital transfer of the country. That means capital account is all about finding the sources of capital and creating the right application for the current account and financial account.
Current Account vs Capital Account (Comparison Table)
|Basis for Comparison between Capital Account vs Current Account||Current Account||Capital Account|
|1. Meaning||Current account is the representation of the trade balance of the country and also of the direct payments and net income.||Capital account is the representation of capital investments and expenditures that don’t affect the trade of the country.|
|2. Measures||The fund inflow and outflow of international trades.||The capital is invested and expended in making the international trade happen.|
|3. Affect changes in||Current account affects the net income of the country.||Capital account affects the current account or the financial account (either to reduce trade deficit or to increase trade surplus).|
|4. Deals with||International trade, receipt of cash non-capital items etc.||The application of the capital and how they are sourced.|
|5. Balance of payment||Current account is one component of the balance of payment.||Capital account is also another component which constitutes the balance of payment.|
Capital account and current account both are very complex aspects of balance of payments. And understanding them totally in this short scope would be impossible.
However, we highlighted the key areas of both current account and capital account so that you can get an overview of how they work.
Another component that we never talked about here is financial account. In short, financial account deals with the claims of financial assets of foreign countries. It includes portfolio investment, direct investment, reserve assets etc. It is a major component of the balance of payments and the amount of transaction under a financial account is usually pretty large.
If you want to know balance of payments in detail, you need to dig deeper into the concepts like current account, capital account, financial account, and balance of trades.
This has a been a guide to the top differences between Current Account vs Capital account. Here we also discuss the Current Account and Capital account differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in Economics –
- What is a Trade Deficit?
- Examples of Balance of Payments Formula
- Top 7 Differences Between Expense vs Expenditure
- Differences Between Deficit and Debt
- Differences Between Balance of Trade vs Balance of Payments
- How to Create Revenue Reserve From Profit?
- Exceptions to Capital Reserve
- Revenue Reserve vs Capital Reserve
- Principles of Microeconomics
- What is Macroeconomics?
- Economies of Scale vs Economies of Scope