Current Account FormulaDefined along with Formula & How to Calculate

Written By:
Lisa Borga

What is the Current Account Formula?

The current balance of a country is its trade balance.

This is a country’s balance of exports and imports of goods and services along with its earnings on foreign investments less any payments it makes to foreign investors.

The current account is one of the three components that make up the balance of the payment system of a country.

The other two components are the capital account and financial account.

The current account formula for the balance of payment is used to measure the export and import of services and goods.

The formula subtracts the net imports of services and goods from the net exports of services and goods and then adds this to the net transfer payments and net earnings from abroad.

In order for a country to have a positive current account, it needs to have a positive trade balance.

A country’s trade balance is the difference between its exports and imports in a certain period of time.

This is the largest component making up the current account.

Countries always want to have a larger amount of exports than imports.

Current Account Equation

Current Account = (X – M) + NY + NCT

Where:

X = Export of goods and services

M = Import of goods and services

NY = Net earnings from abroad

NCT = Net transfer payments

The X – M in this formula represents the trade balance of a country.

This balance will be positive if a country has more exports than it has imports.

The imports, as well as the exports, are made up of services and goods.

Net income is typically made up of income that comes from foreign countries.

Whereas net transfers are government transfers.

Current Account Formula Example

We are now going to do an example using the current account formula so as to better understand how to use the formula.

To do this, we will need to estimate the country’s imports of services and goods and use this to compute the country’s net trade balance.

The net trade balance is the difference between a country’s imports and exports.

We will also make an assumption about the amount of income the country made from its investments in foreign countries.

Additionally, we will need to assume the amount of government transfers the country made since this is also included in the current account formula.

Current Account = (X – M) + NY + NCT

Here is the information necessary to compute the current balance.

Trade Balance (X – M) = Export of Goods + Export of Services – Import of Goods – Import of Services

Trade Balance (X – M)  = 400 + 100 – 200 – 150 = 150

Trade Balance (X – M) = 150

NY (Net Earnings from Abroad) = Compensation Earned by Employees Abroad + Dividend Earned from Investment Abroad – Compensation Paid to Foreign Employees

NY = 75 + 50 – 50 = 75

NY = 75

NCT (Net Transfer Payments) =  Government Transfers + Other Transfers

NCT (Net Transfer Payments) = 200 + 50

NCT (Net Transfer Payments) = 250

Current Account = (X – M) + NY + NCT

Current Account = 150 + 75 – 250

Current Account = -25

This country has a negative current balance, which means that its imports were greater than its exports.

Current Account Formula Example 2

We are now going to look at an actual example.

Below, we have listed the necessary information to calculate the current account for Canada.

This information is for the year 2020.

During the year 2020, Canada had a negative current balance.

This means Canada sends more money to other countries than it receives.

Canada had a trade deficit as well meaning it imported more goods and services than it exported.

However, Canada’s net income was positive, which helped lower its current account deficit.

Current Account = (X – M) + NY + NCT

Current Account = (-45,361) + 10,186 + (-4,240) = -39,41

Relevance and Uses

The current account is a crucial indicator of a nation’s economic health.

If a business purchases products from another country, it must pay for the products in that country’s currency.

When two countries buy each other’s goods or services, the transactions have to be balanced.

The account that is used to balance these accounts is the balance of payments account.

This account is divided into three accounts, the capital account, the financial account, and the current account.

The capital account is used to monitor the transactions between different countries of non-financial assets such as land and property.

The financial account records the funds that move into or out of other nations in investments such as business enterprises or real estate.

The current account keeps track of the inflow and outflow of services and goods between countries.