A:

The balance of payments of a country contains two accounts: current and capital. The current account records exports and imports of goods and services as well as unilateral transfers, whereas the capital account records purchase and sale transactions of foreign assets and liabilities during a particular year.

The Current Account

As the name implies, the current account considers goods and services currently being produced.

The current account deals with short-term transactions known as actual transactions, as they have a real impact on income, output and employment levels of a country through the movement of goods and services in the economy. It is comprised of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares). The credit and debit of foreign exchange due to these transactions are also recorded in the balance of current account. The resulting balance of the current account is approximated as the sum total of balance of trade.

The 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 concerned with all international trade transactions between citizens of a given country and citizens in other countries. The components of the capital account include foreign investment and loans, banking capital and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.

In other words, the capital account is concerned with payments of debts and claims, regardless of the time period. The balance of capital account also includes all items reflecting changes in stocks.

The Bottom Line

In economic terms, the current account deals with receipt and payment in cash as well as non-capital items, and the capital account reflects sources and utilization of capital. The sum of the current account and capital account as reflected in the balance of payments will always be zero; any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.

To go deeper, read the related articles Breaking Down the Balance of Trade and Exploring the Current Account in the Balance of Payment.

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