Current and Capital Accounts of the Balance of Payments

The balance of payments records all economic transactions between a country's residents and the rest of the world during a period. Its current account records trade, income and current transfers, whereas the broadly understood capital account records transactions that change external assets and liabilities.

Transactions recorded

The distinction rests on the economic nature of the cross-border transaction.

• The current account includes merchandise trade, services such as transport and software, primary income such as interest and dividends, and secondary income such as remittances and grants.
• The capital side records changes in ownership of assets and liabilities through foreign direct investment, portfolio investment, external borrowing, banking capital and reserve assets.
• Current-account transactions mainly concern current production, income or transfers; capital and financial transactions alter a country's external claims or obligations.

Meaning of the balances

A current account deficit means that current external payments exceed current external receipts. It must be financed by net capital or financial inflows, a drawdown of foreign-exchange reserves, or a combination of these, subject to errors and omissions.

• The current-account balance is closely related to the difference between national saving and domestic investment.
• Capital inflows can finance investment and a current-account deficit, but debt-creating flows also generate future repayment and income obligations.
• Under double-entry bookkeeping, each international transaction produces offsetting credit and debit entries, so the balance of payments is an accounting statement rather than a simple cash balance.

Modern statistical terminology

Under the BPM6 framework, the capital account is narrowly confined to capital transfers and transactions in non-produced, non-financial assets. Most flows commonly called the capital account in textbook discussion are formally classified under the financial account, which records transactions in financial assets and liabilities.