Principles of Macroeconomics / Unit 7 MAC 0604 worked example, 60 to 90 seconds
Computing the Current Account
The idea
Add the four components with their signs. Goods and services each give exports minus imports, so a country that imports more goods than it exports enters a negative number. Income is receipts from assets owned abroad minus payments to foreign owners of assets at home. Transfers are one-way payments, entered negative when money flows out. Add all four and the total is the current account balance. A negative total is a current account deficit.
In practice
Worked example: goods minus five hundred, services plus one hundred and forty, income plus ninety, transfers minus one hundred and thirty. Adding gives minus five hundred plus one hundred and forty, which is minus three hundred and sixty; plus ninety is minus two hundred and seventy; minus one hundred and thirty is minus four hundred. The current account balance is minus four hundred.
Where people slip
The merchandise balance here is minus five hundred and the current account is minus four hundred, so the two differ by a hundred. A question that gives you all four components is testing whether you use all four.
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