What is the 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. A country always tries to have more export than imports. For the current account to be positive it is important to have a positive trade balance.
Current Account Equation is given below:
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 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.
Examples of Current Account Formula (with Excel Template)
Let’s see some simple to advanced examples of calculation of the Current Account Equation to understand it better.
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Example # 1
Let us try to understand how to calculate current accounts with the help of an example. For calculating current accounts we need to assume how much is the exports for goods and services in a country, similarly w,e need to assume how much is the imports for goods and services in a country. This will let us calculate the net trade balance of the country which is the difference between exports and imports of the country. Also w,e 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 the form of government transfer in a country. The chart below represents the parts of a current account and also the calculation for the current account formula.
Below is given data for Calculation of 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 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 find out that the current balance is positive. We can also see that the trade balance is positive which implies that the exports are more than the imports are. 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 current 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 in terms of as a percentage of GDP. The ratio for 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 a track of this number. The price of oil and gas in the international market has an effect on the current account ratio to GDP for India.
Below is given data for Calculation of Current Account formula
Below is the snapshot of the current account balance for India for the period H1 2016-17.
The table below depicts the summary of the balance of payment for India as released by Reserve bank of India.
Relevance and Use
Whenever someone buys any goods or services from a foreign country they need to buy the currency of those countries in order 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 balance. And they all balance through an account named as a balance of payment. A balance of payment is again divided into three major accounts they are a current account, capital account, and the third account is known as the financial account. The current account includes all imports and exports of goods and services and results in the increase of foreign holdings in a country. On the other hand, the capital account consists of capital transfer and acquisition and disposal of non-financial and none produced assets and results in an increase in gold reserves and foreign currency reserve of the country.
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