The current and capital account balances are two components of the balance of payments. They record non-financial transactions between residents and non-residents in an economy. Transactions of a financial nature are recorded in the financial account (the third balance of payments account). Transactions are recorded in the different accounts of the balance of payments based on the economic nature of the underlying exchange.

What does the current account include?

The current account comprises three components: the trade balance, the primary income account and the secondary income account. 

The trade balance records imports and exports of goods and services. This includes the purchase and sale of goods (e.g. agricultural goods, commodities, machinery and transport equipment, energy, computers and clothing) from/to non-residents, as well as services (e.g. transportation, travel, financial services and telecommunication services) provided between residents and non-residents. 

The primary income account includes receipts and payments associated with income from factors such as labour (employee compensation) or capital (dividends and interest received by residents, because of investments abroad, or paid to non-residents, because of investment in the reference economy).

The secondary income account records current transfers between residents and non-residents that directly influence the economy’s ability to consume goods and services. These include gambling winnings, government grants, international aid, fines and penalties, and personal transfers, including remittances.

What does the capital account include?

The capital account comprises capital transfers, whether in cash or in kind, that are receivable and payable between residents and non-residents. These include EU funds (in the case of EU countries) and transactions involving non-produced non-financial assets, such as transferable contracts with athletes and carbon emission permits.

How do the current and capital account balances work?

The balance of payments follows the double-entry accounting principle. Any transaction with non-residents generates two entries. In the current and capital accounts, credit entries (inflows) reflect exports of goods or services, income or transfers receivable, or the sale of non-produced non-financial assets. On the other hand, debit entries (outflows) are used for imports of goods or services, income or transfers payable, or the purchase of non-produced non-financial assets. The counterbalancing transactions can be recorded in different accounts.

To illustrate this double-entry principle, let’s take a car export as an example. The value of the export is recorded in the goods account. The exported car can be paid for immediately or at some future point, or it can be exchanged for other goods (barter).

  • If the export is paid for immediately, the exporting country can either (i) record an increase in its foreign assets (e.g. deposits placed with foreign banks), or (ii) record a decrease in its liabilities abroad (e.g. thanks to the inflow of domestic currency into the country).
  • If the export is to be paid for at a future date, the exporter records a trade credit (asset) for the amount owed by the non-resident importer.
  • If the export is paid for with other goods, a corresponding import of the same value will be recorded in the goods account.

What can the data tell us?

The combined current and capital account balances determine a country’s financial relationship with the rest of the world, i.e. its net lending or net borrowing position with non-residents over a given period. Thus, a country is in a net lending position when the combined balance of these accounts is positive (i.e. when there’s a current and capital account surplus), and a net borrowing position when the balance is negative (i.e. when there’s a current and capital account deficit).

Are the current and capital account data seasonally adjusted?

Seasonal patterns in data can arise owing to natural factors (e.g. climate events), administrative cycles (e.g. the timing of the school year) or social, cultural or religious traditions (e.g. public holidays). In statistical data, these seasonal effects can mask other phenomena, making it difficult to analyse the general trend of a time series.

For this reason, adjusting data for seasonality makes it easier to compare data across months. The values of certain components of the euro area current account are adjusted for both seasonality and calendar effects on a monthly basis. This can include, for example, accounting for the different number of working days each month or the impact of leap years or moveable holidays. 

 

Related explainers

What is the international investment position?

What is foreign direct investment?

What is external debt?