Class 12 Macro Economics Notes · CBSE

Components of Capital Account

Foreign direct investment, foreign portfolio investment, external borrowings and assistance, changes in foreign exchange reserves, and errors and omissions as a balancing item. CBSE Class 12 Macroeconomics notes

Last updated: 2 Sep 2026

Notes

What is the Capital Account?

Capital Account

Records all those transactions between the residents of a country and the rest of the world which cause a change in the assets or liabilities of the residents of the country or its government. It is related to claims and liabilities of financial nature.

Purpose of Capital Account

Capital Account is used to: (i) Finance deficit in current account; or (ii) Absorb surplus of current account. Capital Account is concerned with financial transfers, so it does not directly affect the country's income, output and employment.

Three Components of Capital Account

Common Exam Trap

Export and import of Capital Goods (like Plant and Machinery, Equipments, etc.) are included in Current Account under the head visible items and not in Capital Account.

Balance on Capital Account

Surplus in Capital Account

Credit items > Debit items → net inflow of capital.

Deficit in Capital Account

Debit items > Credit items → net outflow of capital.

Errors and Omissions

In addition to current account and capital account, there is one more element in BOP, known as ‘Errors and Omissions’. It is the balancing item, which reflects the inability to record all international transactions accurately.

Capital Account Components Summary

Components of Capital Account — Credit, Debit, and Net
Credit Items	Debit Items	Net Credit (Credit − Debit)
1. Borrowings and lendings: Borrowings from abroad	Lendings to abroad	Net Borrowings from abroad
2. Investments from abroad	Investments to abroad	Net investments from abroad
3. Change in Foreign Exchange Reserves: Decreases in reserves	Increases in reserves	Net change in foreign exchange reserves
Capital Receipts (1+2+3)	Capital Payments	Capital Account Balance

Current Account vs Capital Account

Current Account vs Capital Account
Aspect	Current Account	Capital Account
Influence on the economy	Transactions bring a change in the current level of a country's income.	Transactions bring about a change in the capital stock of a country.
Concept	A flow concept as it includes all items of flow nature.	A stock concept as it includes all items expressing changes in stock.
Components	Visible Trade + Invisible Trade + Unilateral transfers	Borrowings/Lendings + Investments + Change in Foreign Exchange Reserves

Accounting Identity

In accounting sense, Current Account + Capital Account = 0. A Current Account Deficit (CAD) must be financed through surplus in Capital Account — through net capital inflows like selling assets or borrowing from abroad. Similarly, a Current Account Surplus (CAS) must be matched by a deficit on the Capital Account.

Key Takeaways

Capital Account records transactions that cause a change in assets or liabilities — it is related to financial claims and liabilities.
The three components are: Borrowings and Lendings, Investments (FDI and Portfolio), and Change in Foreign Exchange Reserves.
Capital Goods (Plant, Machinery, Equipment) are recorded in Current Account, not Capital Account — this is a common exam trap.
Current Account + Capital Account = 0 in accounting sense. A CAD is financed by Capital Account surplus, and a CAS is matched by Capital Account deficit.
Errors and Omissions is the balancing item that reflects the inability to record all international transactions accurately.