Current Account Formula

The current account formula of the Balance of Payment measures the import and export of goods and services and is calculated as the sum of the trade balance, net income, and current transfers. The trade balance is the difference between countries' imports and exports and is the biggest component of the current account. The trade balance is the difference between countries' imports and exports and is the biggest component of the current account.

Current Account Equation from the current account to be positive, it is important to have a positive trade balance. A country always tries to have more exports than imports. Therefore, current account formula economics is the net balance of a country’s trade account internationally after all imports and exports which can be drafted, weekly, monthly, or annually.

The current account is a vital component of a country's balance of payments, including the overall economic transactions between a nation and the rest of the world. It consists of four main elements: the trade balance, net income from abroad, net current transfers, and net services.

The trade balance represents the difference between a country's exports and imports of goods and services. A positive trade balance (surplus) occurs when a country exports more than it imports, while a negative balance (deficit) indicates the opposite.

The net income from abroad accounts for the earnings and payments resulting from foreign investments. It includes income such as dividends, interest, and wages earned by a country's residents abroad minus the corresponding income earned by foreign entities within the country.

The net current transfers involve transfers of money and goods between a country and its international partners. It includes items like foreign aid, remittances, and other unilateral transfers.

The net services include the value of services exchanged internationally, such as transportation, tourism, and business services.

The current account formula balance is a significant indicator of a nation's economic health and its engagement in global trade. A surplus in the current account suggests that a country is a net creditor to the rest of the world, while a deficit implies a net debtor status. Policymakers and analysts closely monitor the current account to assess a country's external financial position and its ability to meet international obligations.

Let us understand the formula to find the current account formula balance. This will serve as the basis for understanding the concept in detail and other related concepts as well.

Where

• X is the export of goods, and M is the import of goods
• NI is the net income
• NT is the net current transfers

In this formula, X-M stands for trade balance. For the trade balance to be positive, a country needs to have more exports than imports. The exports and imports include both goods and services produced in the country. Net income mainly includes income from foreign countries, and net transfers consist of government transfers.

Let us discuss current account formula economics with the help of a couple of examples that will help us understand the intricacies of the concept.

Example # 1

Let us try to understand how to calculate current accounts with the help of an example. To calculate current accounts, we need to assume how much the exports for goods and services in a country are. Similarly, we need to assume how much the country's import for goods and services is. This will let us calculate the net trade balance of the country, which is the difference between exports and imports of the country. Also, we need to assume how much the income from the investments made in a foreign country is. Current accounts also include the current transfers, mainly in government transfers in a country. The chart below represents the parts of a current account and the calculation for the current account formula.

Below is given data for the calculation of the current account.

Calculation of balance of goods and services

The balance of Goods and Services = (X-M)

=175-(-25)

The balance of Goods and Services = 150

Calculation of Total Income

Total Income = 65+140

Total Income =205

Calculation of Total Current Transfers

Total Current Transfers = -240+(-60)

Total Current Transfers =-300

Therefore, the calculation of the total current account can be done as follows,

Total Current Account = (X-M) + NI + NT

=(150)+205+(-300)

Total Current Account will be -

Total Current Account =55

From the example, we can see that the current balance is positive. We can also see that the trade balance is positive, implying that the exports are more than the imports. All these calculations are also presented in the excel sheet attached.

Example # 2

Let us look at a practical example of the current accounts of a country. India always has a current account deficit as it imports close to 90% of its energy requirements. India as a country is the third-largest consumer of oil and gas but produces very little quantity. That’s why the country always has a current account deficit. The latest account deficit for Q1'19 for India stands at around $15.8, which is very high even for India. The current account deficit or surplus is always measured as a percentage of GDP. The ratio for the current account deficit as a percentage of GDP for India stands at 2.4%. A higher ratio is considered to be adverse for the country. The country tries to have a lower ratio, and the investors in a country always keep track of this number. The price of oil and gas in the international market affects India's current account ratio to GDP.

Below is given data for the Calculation of the Current Account formula

Below is the snapshot of the current account balance[/wsm-tooltip for India for the period H1 2016-17.

The table below depicts the summary of the balance of payment for India as released by the Reserve Bank of India.

Import and export of goods has been one of the major drivers of economies across the globe. This is one of the foremost reasons why globalization is considered one of the best global decisions of the century. Therefore, to ensure the current account formula balance of a country is positive means that the country has had a good period of give and take from other economies around the globe.

Let us understand the importance of the concept through the discussion below.

Whenever someone buys any goods or services from a foreign country, they need to buy the currency of those countries to pay for the goods or services. The same thing applies when someone buys from a different country any goods and services in the country, they need to buy domestic currency. All these transactions need to be balanced. And they all balance through an account named as a balance of payment. A balance of payment is again divided into three major accounts: a current account, a capital account, and the third account, known as the financial account. The current account includes all imports and exports of goods and services and increases foreign holdings in a country. On the other hand, the capital account consists of capital transfer and acquisition and disposal of non-financial and non-produced assets, increasing the country's gold and foreign currency reserves.