What is the Current Account Formula?

The current account formula of the Balance of PaymentBalance Of PaymentThe formula for Balance of Payment is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to the recording of all payments and obligations pertaining to imports from foreign countries vis-à-vis all payments and obligations pertaining to exports to foreign countries. It is the accounting of all the financial inflows and outflows of a nation.read more measures the import and export of goods and services and is calculated as the sum of the trade balance, net income, and current transfers.

For the current account to be positive, it is important to have a positive trade balance. 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 exports than imports.

Current Account EquationAccount EquationAccounting Equation is the primary accounting principle stating that a business’s total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more is given below:

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Where

  • X is the export of goods, and M is the import of goodsNI is the net incomeNT 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.

Examples of Current Account Formula (with Excel Template)

Let’s see some simple to advanced examples of the Current Account Equation calculation to understand it better.

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.

Relevance and Use

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.

This has been a guide to the Current Account Formula. Here, we discuss calculating the current account using its formula and practical examples and a downloadable excel template. You can learn more about economics from the following articles –

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