Current Account vs Capital Account

Definition of Current Account vs Capital Account

Current account: Current account mainly represents the inflow and outflow of goods and services in the economy. It is further decomposed into four sub-accounts. A current account is one of the components of BOP that deals with a trade of ‘goods’ & ‘services’ of one country with another.

Capital account: Capital account represents the inflow and outflow of capital in the economy, made by public and private entities. It mainly depicts the foreign investment in domestic entities and domestic investment made in foreign entities.

Overview

Globalization of world economies has helped countries widen their trade, investments, and Risk. World economies have become interconnected, wherein the growth/decline of a country affects another. In order to gauge the performance of the trade and investments, Central banks maintain a double-entry bookkeeping system termed as ‘Balance of payments. A balance of payments (BOP) can be typically summarized as a record of economic transactions of any country with the rest of the world for a particular period of time. BOP represents the exports and imports of a country with its trading partners, wherein a country whose exports exceed its imports is categorized as ‘Balance of payment surplus’. On the other hand, a country that imports more than it exports is said to be in deficit. BOP gives an accurate picture of a country’s macroeconomic conditions and its long-term growth prospects.

The main components of the Current account are:

1. Merchandise trade: It consists of all manufactured goods, and commodities that are bought from or sold to other countries.
2. Services: Services consist of all the invisible services that a country provides to or receives from other countries. It mainly includes Tourism, Transportation, Engineering, Management consulting, Accounting, and legal services.
3. Income receipts: It consists of all the income that is derived from the ownership of assets in foreign countries, such as Dividends and interest payments.
4. Unilateral transfers: It represents the transfer of money such as worker remittances from abroad to their home country.

The main components of the Capital account are:

1. Foreign direct investment (FDI): The investment made by foreign entities in domestic businesses, in a form of joint ventures is known as foreign direct investment. Every country follows stringent processes to regulate the FDI’s in order to ensure proper control and profitability for domestic entities.
2. Foreign portfolio investment (FPI): FPI consists of the investments made in financial assets such as stocks, bonds, mutual funds, etc. In the context of the Indian economy, both FDI & FPI bring in foreign capital inflows into the country, resulting in strong demand for the Indian rupee.

Head to Head Comparison Between Current Account vs Capital Account (Infographics)

Below is the top 6 difference between Current Account vs Capital Account

Key Differences Between Current Account vs Capital Account

As we already know, both current account vs capital account are the key components of the Balance of payments, and both current account vs capital account differ in nature. Let us discuss some key differences :

• The current account consists of the flow of ‘goods & services’ in an economy, whereas Capital account represents the flow of ‘capital’ in the economy.
• A current account is a measure of Trade of any country and helps in evaluating the inflow and outflow of visible goods and invisible services in the economy. On the other hand, the current account is a measure of capital investments made in the economy and helps in evaluating sources and uses of capital.
• The key components of the current account are Merchandise trade, services, income receipts, and unilateral transfers. Whereas Capital account consists of foreign direct investment, foreign portfolio investment and loans and advances made by a country to another country.
• The current account depicts the Net income position of the country, whereas Capital account represents changes in ownership of assets of a country.
• A country is said to be a net lender if its current account balance is a positive and net borrower if its current account balance is negative. Similarly, under the capital account, if the country’s claims on the rest of the world are positive, it is termed as a net creditor and net debtor for vice versa.

Current Account vs Capital Account Comparison Table

Let’s have a look at the Comparison between Current Account vs Capital Account:

Basis of Comparison	Current Account	Capital Account
Meaning	A current account is one of the components of BOP that deals with a trade of ‘goods’ & ‘services’ of one country with another	The capital account is another key component of BOP that deals with ‘capital investments’ and ‘expenditures’ of one country with another
Measures	It measures the inflow and outflow of ‘goods and services’ in the economy	It measures the inflow and outflow of ‘capital’ in the economy
Key components	The key components of Current account are ‘Merchandise trade’, ‘Services’ ‘Income receipts’, and ‘unilateral transfers’	The key components of the Capital account are ‘Foreign direct investment (FDI)’ and ‘Foreign portfolio investment (FPI)’
Evaluation	It helps the investors in evaluating ‘Trade surplus’ or ‘Trade deficit’ of any country’	It helps the investors in evaluating the ‘Net investment’ position of a country
Impacts	Current account impacts the net income and output of a country	Capital account impacts the foreign assets & liabilities of a country
Transaction	Current account deals with receipts and disbursements in ‘cash’ and ‘non-capital items’	Capital account deals with sources & utilization of ‘capital’

Conclusion

Both the difference between a current account vs capital account helps in evaluating the Macroeconomic picture of a country, its monetary & fiscal policies, and future growth potential. While the Current account measures the Inflow of goods and services in an economy, the other hand, Capital account gauges the inflow and outflow of capital in the economy.

The reason why investors look up to these data points is their relevance in gauging the International trade and investments of a country. If the country’s Current account shows a trade surplus, it indicates that the country has exceeded its exports more than imports, which results in a strengthening of its currency. Similarly, if the country’s capital account shows ‘Net creditor’, it represents that the country owns more capital/assets than it owes to the rest of the world.

The investors perceive the economy to be in a poor state If its capital account shows ‘Trade deficit’, that indicates that the country’s imports are more than its exports. Similarly, the country is said to be a ‘Net borrower’, if it owes more capital/assets than it owns.

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