Current Account vs Capital Account

Differences Between Current Account and Capital Account

Current account is the financial account of the economy or any individual entity which shows results of various revenue income and expenditure and calculates revenue profits while capital account indicates various capital income and expenditure like purchase and sale of fixed asset, capital repairs, sale of investments etc

If you want to understand the detailed account of the balance of payments, it is important that you understand both this type of 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 they are the two crucial key elements of the balance of payments other than financial accounts.

  • 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.
  • The 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.

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Current Account vs Capital Account Infographics

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Key Differences

  • Current account is the sum-total of the net balance of export and import and the net income & direct transfer. The 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. The 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. The 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 the capital account is all about finding the sources of capital and creating the right application for the current account and financial account.

Comparative Table

Basis for Comparison Current Account Capital Account
1. Meaning It is the representation of the trade balance of the country and also of the direct payments and net income. It 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 international trade happen.
3. Affect changes in It affects the net income of the country. It 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 The current account is one component of the balance of payment. The capital account is also another component that constitutes the balance of payment.

Conclusion

Both are very complex aspects of the balance of payments. And understanding them totally in this short scope would be impossible. However, we highlighted the key areas of both so that you can get an overview of how they work.

Another component that we never talked about here is a 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 the balance of payments in detail, you need to dig deeper into the concepts like current account, capital account, financial account, and balance of trades.

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This has been a guide to the Current Account vs Capital Account. Here we discuss the top differences between them. along with infographics and comparison table. You may also have a look at the following articles for gaining further knowledge in Economics –