What is the difference between current accounts and capital transactions?

Answer:

The balance of payments of the country, containing two accounts: current and capital. Current account exports and imports of goods and services and unilateral transfers, while the capital account transactions of purchase and sale of foreign assets and liabilities for a particular year.

Current Account

As the name implies, accounts considers goods and services produced currently.

The current account deals with short-term deals known as real transactions, as they have a real impact on income, output and employment in the country through the movement of goods and services in the economy. It consists of visible trade (exports and imports), invisible trade (exports and imports of services), unilateral transfers and investment income (income from factors such as land or foreign stocks). The credit and debit of foreign currency for these transactions are also reflected in the current account balance. As a result, the current account balance is approximated as the sum of the trade balance.

The Account Of Operations With Capital

The account of capital transactions is a record of inflows and outflows of capital that directly affect foreign assets and liabilities. This applies to all international trade transactions between the citizens of this country and citizens in other countries. Components account capital account transactions include foreign investment and loans, banking capital and other capital and monetary movements or changes in foreign exchange reserves. The flow of capital reflects factors such as commercial loans, banking services, investments, loans and capital.

In other words, the capital account associated with the payment of debts and claims, regardless of the time period. Account balance of capital transactions also includes all of the items reflecting changes in stocks.

Bottom Line

From an economic point of view, the current account transactions with receipt and payment in cash and non-capital items and expense transactions with equity shows the sources and use of capital. The sum of current account and capital account as reflected in the balance of payments is always zero; any excess or deficit in the current account and canceled corresponds to an equal surplus or deficit in the account of capital transactions.

To go deeper, read related articles breaking down the trade balance and the study of current account balance of payments.

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