Sociology

Description of current account and capital account relevant to the balance of payments table.

Balance of Payments
A countrys balance of payment record is an archive of transactions made with other countries of the world. This comprises of imports and exports of goods and services along with other transfers of funds into and out of the economy such as payments and receipts of loans, dividends, interest, aid and other investments. Generation of funds is recorded as a positive while the use is recorded as negative which means that after the inclusion of all the relevant transactions the sum of balance of payments table must always be zero. (Mankiw, 2008)

Current Account
Current account is one of the two major components that make up the balance of payments table. It reflects the net income of an economy. Sum of three factors make up the current balance. First is trading account. It includes imports and exports of goods and services with other countries. Exports are recorded as positive while imports as negative. Second is the factor income which includes interest and dividend paidreceived on loans and investment. Third factor is the transfer payments which significantly comprise of foreign aids and grants. Excess of inflow from these transactions over the outflow creates a current account surplus. If the scenario is reverse it is called a deficit. (Mankiw, 2008)

Capital Account
Capital account can be said as mirror image of current account and shows how the ownership of the asset changes between a nation and the rest of the world. The effect of any activity in the capital account is reflected in the current account. Capital account has three components. First is the foreign direct investment such as setting up manufacturing plants and machinery. Capital account increases when foreigners invest in a country and decreases when locals invest in other countries. Second is portfolio investment which includes sale and purchase of bonds and shares. Third is other investment which reflects exchange of liquidity among local and foreign banks in form of deposits and loans. This investment gives advantage when interest rates and exchange rates among countries fluctuate. The amount of profit from FDI, interest and dividends from portfolio and other investments are later reflected in the current account. (Mankiw, 2008)