Practice: The balance of payments. Next lesson. Current timeTotal duration Google Classroom Facebook Twitter. Video transcript - [Tutor] Let's see if we can give ourselves an intuitive understanding of why the current account balance and the capital account balance nets out and over here I have simplified versions of the current account and the capital account for the US in We'll just go line by line and think about what this is saying and also think about the big picture in terms of the actual transfer of US dollars.
So first right over here on the current account, we see that we have a balnce of trade or we have a trade deficit right over here, the US is importing much more than it is exporting and so for net basis, you're importing a bunch of stuff, you have to pay the foreigners for the stuff you imported and so you have an outflow of funds and this dominates the current account right here, it's the great majority of the current account balance.
If there is an export of goods or services the current account will be credited while if there is an import the account will be debited. In contrast to capital account, if there is a purchase of machinery from a foreign country, then the capital account will be debited whereas if a building is purchased in a country by a foreign country then the account will be credited. The Balance of Payment is the sum total of both the accounts.
Apart from all the differences between the two accounts of the balance of payment, if one account shows surplus the other will show the deficit and vice versa, but at the end, both the accounts will get balanced.
Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Key Differences Between Current Account and Capital Account The following are the major differences between current account and capital account: Current account records the trading in goods and services in the current period.
Capital Account records the movement of capital in and out the economy. Current Account is mainly concerned with receipts and payment of cash and non-capital items. Conversely, Capital Account has thoroughly considered the sources and application of capital. The key components of current account are export and import of goods and services, the investment the income and current transfers.
You may also have a look at the following articles for gaining further knowledge in Economics —. Free Investment Banking Course. Login details for this Free course will be emailed to you. Forgot Password? Article by Sayantan Mukhopadhyay. Differences Between Current Account and Capital Account Current account is the financial account of the economy or any individual entity which shows results of various revenue income and expenditure and calculates revenue profits while capital account indicates various capital income and expenditure like purchase and sale of fixed asset, capital repairs, sale of investments etc If you want to understand the detailed account of the balance of payments, it is important that you understand both this type of account.
Please select the batch. Cookies help us provide, protect and improve our products and services. 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 non-capital 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 account deals with a country's short-term transactions or the difference between its savings and investments. These are also referred to as actual transactions as they have a real impact on income , output and employment levels through the movement of goods and services in the economy.
The current account consists 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 from these transactions are also recorded in the balance of the current account. The resulting balance of the current account is approximated as the sum total of the balance of trade.
Transactions are recorded in the current account in the following ways:. The current account gives economists and other analysts an idea of how the country is faring economically. The difference between exports and imports, or the trade balance, will determine whether a country's current balance is positive or negative. When it is positive, the current account has a surplus, making the country a "net lender" to the rest of the world. A deficit means the current account balance is negative.
In this case, that country is considered a net borrower. If imports decline and exports increase to stronger economies during a recession, the country's current account deficit drops. But if exports stagnate as imports grow when the economy grows, the current account deficit grows. It is concerned with all international trade transactions between citizens of one country and those in other countries.
The components of the capital account include foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve.
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