The current account and capital account comprise the two elements of the balance of payments in international trade. Whenever an economic actor (individual, business or government) in one country trades with an economic actor in a different country, the transaction is recorded in the balance of payments. The current account tracks actual transactions, such as import and export goods. The capital account tracks the net balance of international investments – in other words, it keeps track of the flow of money between a nation and its foreign partners.
Like all other forms of financial accounting, the balance of payments always has the same value of debits and credits. A country that has a current accounts deficit necessarily has a capital accounts surplus, and vice versa.
There are three broad components of the current account: balance of trade, net factor income and net transfer payments. Most traditional forms of international trade are covered in the current account. These transactions tend to be more immediate and more visible than the transactions recorded in the capital account.
For example, the current account is immediately impacted when U.S. farmers sell wheat to Chinese consumers or when Chinese manufacturers sell computers to U.S. consumers.
Flows in and out of the capital account represent changes in asset value through investments, loans, banking balances and real property value. The capital account is less immediate and more invisible than the current account. Many common misunderstandings about international trade stem from a lack of understanding of the capital account.
Common forms of capital account transactions include foreign direct investment or loans from foreign governments. The vast majority of global capital account transfers take place between the world's wealthiest businesses, banks and governments.
When there is a trade imbalance in goods and services between two nations, those imbalances are financed by offsetting capital and financial flows. A country with large balance of trade deficits, such as the U.S., will have large surpluses in investments from foreign countries and large claims to foreign assets.