Current Account
The current account deals with the inflow and outflow of money within a given year for a particular country. This inflow/outflow of currency occurs due to trading activities (export and import of goods and services) and financial transfers. It is one of the two accounts that is part of the balance of payments. The transactions that are a part of the current account are referred to as the actual transactions since they make a real impact on the income, output as well as employment levels through the movement of commodities and services in the economy. The reporting of the current account is done by the Reserve Bank of India. A negative balance in the current account means that the imports are more than exports, and the overall consumption exceeds savings. While a positive balance means that the exports are greater than imports and savings are more than consumption.
The current account contains transactions that reflect the export and import of goods (visible trade) and services (invisible trade), income transfers and investment income from factors like land or foreign shares. The current account is a reflection of the actual financial status of an economy. Both the debit and credit of foreign exchange from these transactions also get recorded in the final balance for the current account. The balance of the current account is seen as the sum total of the balance of trade.
Capital Account
The capital account is a record of the inflows and outflows of capital that directly affect a nation’s foreign assets and liabilities. It is mainly concerned with the transactions which are a part of international trade. It is also a part of the balance of payments. The main components that are a part of the capital account include banking, foreign investment, loans, and other capital or monetary movements in the foreign exchange reserve. The capital account flow reflects the factors like commercial borrowings, investments, loans, banking and capital.
A surplus in capital account indicates an inflow of money into a country, while a deficit indicates capital moving out of the country. This may also point to the fact that the country is looking to increase their overall value of foreign holdings. In other words, the capital account is concerned with payments of debts and claims, regardless of the time period. The balance of the capital account also includes all items reflecting changes in stocks.
Difference between Current Account and Capital Account
Although both are a part of the balance of payments of a country, there are several areas of difference between current account and capital account, which we will discuss in the below table:
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The current account mainly focuses on recording the export and import of merchandise along with any unilateral transfers that are completed within the year by a country. |
The capital account mainly focuses on recording the trading of foreign assets and liabilities during a year by a country. |
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The current account reflects the total net income of a country within a year. |
The capital account reflects the net change in the ownership of national assets of a country within a year. |
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The current account mainly focuses on the receipts and disbursements related to the cash and non-capital items. |
The capital account mainly focuses on the sources and utilisation of capital. |
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The main components within a current account are as follows:
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The main components within a capital account are as follows:
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The main purpose of a current account is that it helps the investors find out the trade deficit or trade surplus of a country. |
The main purpose of a capital account is to help the investors determine the net investment position of a country. |
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If the current account balance is negative, then a country is a net borrower. Similarly, if the account balance is positive, then the country is a net lender. |
If there is a surplus in the capital account, it indicates an inflow of money for a country. Similarly, if there is a deficit in the capital account, it indicates an outflow of currency from the country. |
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The current account is mainly concerned with the receipts and payment of cash and non-capital items. |
The capital account is mainly concerned with the sources and utilisations of the capital items. |
Conclusion
It is important to understand that a firm requires both a Current Account and Capital Account to run its operations smoothly. Both of these accounts are a part of the balance of payments, and there are several points of difference between the two. But still, every country should aim to maintain a surplus balance to have a steady outlook in the long term. They have a very important role to play in the monetary and fiscal policies of a nation, and as such, governments must focus on transactions related to these accounts to have stronger growth potential.
Frequently Asked Questions
What are the main components under portfolio investments within the capital account?
- Investments in stocks
- Investments in bonds
- Investments in mutual funds
- Investments in debts and other financial assets
What are some examples of services within the current account?
Some of the main examples of services under the current account are as follows:
- Transportation
- Tourism
- Management Consulting
- Accounting services
- Legal Services
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