Question

Distinguish between the Current Account and Capital Account of the Balance of Payments.

Hint:

BoP memory trick: “C2 Rule”

• Current = Consumption flows
• Capital = Capital flows

Trade $\rightarrow$ Current, Investment $\rightarrow$ Capital.

Answer 1

Concept: The Balance of Payments (BoP) is a record of all economic transactions between residents of a country and the rest of the world during a given period. It is broadly divided into:

• Current Account
• Capital Account

Current Account: The current account records transactions related to income and consumption.
Includes:

• Export and import of goods (visible trade)
• Export and import of services (invisible trade)
• Income receipts (interest, dividends)
• Transfer payments (remittances, gifts, aid)

Nature:

• Short-term transactions
• Do not affect assets and liabilities significantly

Capital Account: The capital account records transactions that affect ownership of assets and liabilities between countries.
Includes:

• Foreign direct investment (FDI)
• Portfolio investment (shares, bonds)
• Loans and borrowings
• Banking capital flows

Nature:

• Long-term financial transactions
• Affect foreign assets and liabilities

Key Differences: \[ \begin{array}{|c|c|c|} \hline
Basis &
Current Account &
Capital Account
\hline Type of Transactions & Trade and income & Investment and loans
\hline Nature & Revenue transactions & Capital transactions
\hline Time Period & Short-term & Long-term
\hline Impact & No ownership change & Changes asset ownership
\hline Examples & Exports, remittances & FDI, foreign loans
\hline \end{array} \]
Conclusion: The current account reflects a country’s trade and income position, while the capital account shows how it finances deficits or invests surpluses through capital flows.