Current Account vs. Capital Account — What's the Difference?

By Tayyaba Rehman — Published on October 14, 2023

The Current Account tracks trade in goods and services, while the Capital Account records capital transfers and purchase or sale of non-financial assets.

Difference Between Current Account and Capital Account

Table of Contents

➝ Key Differences ➝ Comparison Chart ➝ Definitions ➝ FAQs

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Key Differences

The Current Account deals with transactions of goods, services, income, and current transfers, acting as a reflection of a nation's net income. On the other hand, the Capital Account deals with the exchange of capital, including financial assets and liabilities, highlighting a nation's external assets and liabilities.

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A deficit in the Current Account means a country is spending more on foreign trade than it is earning. In parallel, a deficit in the Capital Account indicates more capital is leaving the country than coming in.

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Transactions under the Current Account are short-term and recurrent, including items like exports and imports of goods, services, and unilateral transfers. In contrast, the Capital Account captures long-term transactions, encompassing foreign investments and loans.

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The Current Account is crucial for evaluating a country's trade balance, indicating whether a country is a net lender or borrower. The Capital Account, however, offers insights into how the country finances its deficit or what it does with its surplus.

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Comparison Chart

Nature of Transactions

Deals with trade of goods and services

Handles capital transfers and non-financial assets

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Duration of Transactions

Short-term and recurrent

Long-term

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Significance

Indicates trade balance and nation's net income

Shows nation's external assets and liabilities

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Types of Transactions

Imports, exports, services, unilateral transfers

Foreign investments, loans, buying/selling of assets

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Deficit Implication

Country spends more on foreign trade than earning

More capital leaving than entering

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Definitions

Current Account

Reflects whether a country is a net lender or borrower.

Persistent deficits in the current account might raise concerns about economic sustainability.

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Capital Account

Represents the purchase and sale of non-financial assets.

Acquiring land in another country would appear in the capital account.

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Current Account

Measures the flow of goods, services, and unilateral transfers.

The current account tracks both merchandise trade and services rendered.

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Capital Account

Captures financial transactions like foreign investments and loans.

When a country borrows from international lenders, it's noted in the capital account.

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Current Account

Represents short-term, recurrent transactions.

Monthly import and export data are parts of the current account.

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Capital Account

Chronicles the flow of capital transactions between countries.

Foreign direct investments are recorded in the capital account.

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Current Account

A record of a country's trade in goods and services.

A deficit in the current account indicates more imports than exports.

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Capital Account

Indicates how a nation finances its deficit or uses its surplus.

If a country has a current account deficit, the financing might be reflected in the capital account.

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Current Account

Indicates a nation's net income from abroad.

A surplus in the current account shows the country has positive net earnings.

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Capital Account

Gives insights into a nation's external assets and liabilities.

The capital account helps track a country's international financial position.

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FAQs

Can a country have a surplus in both accounts simultaneously?

Theoretically, yes, but typically if the Current Account has a surplus, the Capital Account will have a deficit, and vice versa.

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What's a primary concern with consistent Current Account deficits?

Persistent Current Account deficits can raise questions about a country's economic sustainability.

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How does the Capital Account differ from the Current Account?

The Capital Account deals with capital transfers and non-financial assets, whereas the Current Account handles trade transactions.

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How does the Capital Account affect a nation's external financial position?

The Capital Account provides insights into a country's international assets and liabilities.

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How are foreign direct investments documented in these accounts?

Foreign direct investments are recorded in the Capital Account.

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How does a country finance its Current Account deficit?

Typically, a country finances its Current Account deficit through inflows captured in the Capital Account.

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What does the Current Account primarily record?

The Current Account primarily records trade in goods and services.

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What happens when there's a deficit in the Capital Account?

A Capital Account deficit indicates more capital is leaving the country than entering.

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Does the Current Account include services rendered to other countries?

Yes, the Current Account includes the trade of both goods and services.

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Is the Current Account concerned with long-term or short-term transactions?

The Current Account deals with short-term, recurrent transactions.

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General Reserve vs. Capital Reserve

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Author Spotlight

Written by

Tayyaba Rehman is a distinguished writer, currently serving as a primary contributor to askdifference.com. As a researcher in semantics and etymology, Tayyaba's passion for the complexity of languages and their distinctions has found a perfect home on the platform. Tayyaba delves into the intricacies of language, distinguishing between commonly confused words and phrases, thereby providing clarity for readers worldwide.