Current Account vs Capital Account

Publication Date :

25 Mar, 2018

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Table Of Contents

Differences Between Current Account and Capital Account

The 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, you must understand this type of account.

Since no country alone is sufficient to provide for itself, most countries import goods from other countries to meet the needs 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, 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 briefly talked about the balance of payments 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.

The current account records all the trading-related fund inflows and outflows. It includes trading of services, goods, products, miscellaneous expenses, and other incomes.
On the other hand, the capital account is much bigger than the current account because it deals with capital investments and expenditures. It also includes investments made by public and private companies.

Differences Between Current Account and Capital Account

Current Account vs Capital Account Infographics

Key Differences

The current account is the sum-total of the net balance of export and import and the net income & direct transfer. On the other hand, the capital account is the sum-total of non-financial assets acquired/disposed of, insurance received from foreign insurance companies for catastrophic losses, and debt forgiveness.
The current account is used for trade affairs. On the other hand, the capital account is used for miscellaneous affairs. That means a capital account is combined with either a current or financial account to be of any value.
The current account is regularly used, and the amount is usually small to medium. On the other hand, the capital account is used very infrequently, and the amount of capital account is usually large but not very large.
The 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 represents 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 country's trade.
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 or financial accounts (to reduce trade deficit or 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. It is a major component of the balance of payments, and the amount of transactions under a financial account is usually pretty large. It includes portfolio investment, direct investment, reserve assets, etc. In short, a financial account deals with the claims of financial assets of foreign countries.

If you want to know the balance of payments in detail, you need to dig deeper into current account current account, capital account, financial account, and balance of trades.