Wednesday, May 19, 2021

Current Account and Capital Account of Balance of Payments

 Current Account and Capital Account of Balance of Payments

The current and capital accounts represent two halves of a nation's balance of payments. The current account represents a country's net income over a period of time, while the capital account records the net change of assets and liabilities during a particular year. In economic terms, the current account deals with the receipt and payment in cash as well as noncapital items, while the capital account reflects sources and utilization of capital. The sum of the current account and capital account 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. The current and capital accounts are two components of a nation's balance of payments. The current account is the difference between a country's savings and investments.


The balance of payments (BOP) is the record of any payment or receipt between one nation and its nationals with any other country. The current account, the capital account, and the financial account make up a country's BOP. Together, these three accounts tell a story about the state of an economy, its economic outlook, and its strategies for achieving its desired goals. A large volume of imports and exports, for example, may indicate an open economy that supports free trade. On the other hand, a country that shows little international activity in its capital or financial account may have an underdeveloped capital market and little foreign currency entering the country in the form of foreign direct investment. A current account records the flow of goods and services in and out of a country, including tangible goods, service fees, tourism receipts, and money sent directly to other countries either as aid or sent to families. A financial account measures the increases or decreases in international ownership assets that a country is associated with, while the capital account measures the capital expenditures and overall income of a country.

The capital account is part of a country's balance of payments. It measures financial transactions that affect a country's future income, production, or savings. An example is a foreigner's purchase of a U.S. copyright to a song, book, or film. Its value is based on what it will produce in the future. The Federal Reserve calls these transactions non-produced, nonfinancial assets.1 When these transactions generate income, they are transferred to another part of the balance of payments. If they produce investment income, they are transferred to the financial account. If they produce income from goods or services, they are transferred to the current account. In the United States, the Bureau of Economic Analysis measures capital account transactions. The capital accounts transactions are large and irregular. They are difficult to measure because they don't show up in the BEA's regular reports. The BEA puts them in the capital account so they don't affect the gross domestic product or the gross national product reports.

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