Current Account Formula (Table of Contents)
What is a Current Account Formula?
In international trade parlance, the term “current account” refers to a nation’s trade balance for goods and services with the rest of the world plus net earnings from abroad and net transfer payments over a period of time, which may be monthly, quarterly or annually. The trade balance basically arises out of imports and exports of all kinds of goods and services. The formula for a current account can be derived by deducting imports of goods and services from exports of the same, then the result is added to the net earnings from abroad and net transfer payments. Mathematically, it is represented as,
where,
- X = Export of goods and services
- M = Import of goods and services
- NY = Net earnings from abroad
- NCT = Net transfer payments
Examples of Current Account Formula (With Excel Template)
Let’s take an example to understand the calculation of Current Account in a better manner.
Current Account Formula – Example #1
Let us take the example of a nation to understand the concept of the current account balance. The table below gives a snapshot of the balance of payment, using which Calculate the current account balance for the nation.
Solution:
Trade Balance (X – M) is calculated using the Formula given below
Trade Balance (X – M) = Export of Goods + Export of Services – Import of Goods – Import of Services
- Trade Balance (X – M) = $300 + $100 – $150 – $130
- Trade Balance (X – M) = $120 Million
NY (Net Earnings from Abroad) is calculated using the Formula given below
NY (Net Earnings from Abroad)= Compensation Earned by Professionals Abroad + Dividend Earned from Investment Abroad – Compensation paid to Foreign Employees
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- NY (Net Earnings from Abroad) = $50 + $20 – $90
- NY (Net Earnings from Abroad) = -$20 Million
NCT (Net Transfer Payments) is calculated using the Formula given below
NCT (Net Transfer Payments) = Foreign Direct Investment Received – Foreign Aid Extended
- NCT (Net Transfer Payments) = $200 – $50
- NCT (Net Transfer Payments) = $150 Million
Current Account is calculated using the Formula given below
Current Account = (X – M) + NY + NCT
- Current Account = $120 + (-$20) + $150
- Current Account = $250 Million
Therefore, the nation has managed a surplus current account balance of $250 Million.
Current Account Formula – Example #2
Let us take the example of the excerpts from the balance of payment of the United States to calculate the current account balance for the year 2018. The following information is available:
Trade Balance (X – M) is calculated using the Formula given below
Trade Balance (X – M) = Trade Balance for Goods + Trade Balance for Services
- Trade Balance (X – M) = (-$891.3) + $269.2
- Trade Balance (X – M) = -$622.1 Billion
Current Account is calculated using the Formula given below
Current Account = (X – M) + NY + NCT
- Current Account = (-$622.1) + $244.3 + (-$110.7)
- Current Account = -$488.5 Billion
Therefore, the United States had a current account deficit of $448.5 billion during 2018.
Explanation
The formula for a current account can be derived by using the following steps:
Step 1: Firstly, determine the export of the nation, which is the value of the goods and services produced within the nation and sold outside the nation, and it is denoted by X.
Step 2: Next, determine the import of the nation, which is the value of the goods and services purchased from outside the nation, and it is denoted by M.
Step 3: Next, calculate the trade balance of the nation by deducting the import (step 2) from the export (step 1) and it is the largest component of the current account balance.
Trade Balance = X – M
Step 4: Next, determine the net earnings from abroad, which is the income earned by the citizens of the nation from their foreign assets or the professionals working abroad, minus income paid to foreigners for their assets in the nation or their wages paid to the foreigners. The net earnings from abroad are denoted by NY.
Step 5: Next, determine the net transfer payments, which include transfers made by the working professional to their home country. Further, it also includes foreign direct investments and foreign aid extended by the nation’s government to other countries. The net transfer payments are denoted by NCT.
Step 6: Finally, the formula for a current account can be derived by summing up trade balance (step 3), net earnings from abroad (step 4) and net transfer payments (step 5) as shown below.
Current Account = (X – M) + NY + NCT
Relevance and Uses of Current Account Formula
It is one of the most important economic factors to determine the financial position of a nation. As such, all the countries endeavor to accumulate enough wealth by exporting more goods and services than what they import which results in trade surplus because the nation is able to earn more in exports than what it spends towards imports. On the other hand, countries run into the deficit when they import more goods and services than what they export. Consequently, countries that have enough wealth to fund all their purchases are said to have their current account in balance. Further, the surplus of net earnings from abroad and net positive transfer payments adds to the well-being of a nation.
Current Account Formula Calculator
You can use the following Current Account Formula Calculator.
| (X-M) | |
| NY | |
| NCT | |
| Current Account Formula | |
| Current Account Formula = | (X-M) + NY + NCT | |
| 0 + 0 + 0 = | 0 |
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