The Current Account Balance (CAB) is one of the most important type of functions related to a country’s Balance of Payments. The capital account and the financial account are other two important kinds of functions related to services going in and out country and international flows of capital.
Importance:
The Current Account Balance is a very important metric as it shows the overall economic position of the country.
The surplus current account balance of a country shows that economy is in a good shape as it is a net creditor as compared to the rest of the world. The positive current account balance also depicts that country is saving as compared to investing. This also shows that country is also offering an abundance of resources to other countries. However, the negative CAB level shows that country is a net debtor to the world and its economy is in a very bad shape. that is in deficit however, shows that an economy that is a net debtor to the rest of the world meaning that it is investing more than it is saving and so is using resources from other economies in order to meet its own domestic consumption and investment requirements.
Background:
A current account is a very good way to measure the economic activity of any country as it allows us create a clear picture of the current extent of economic activity. It is very beneficial for creating a picture of country’s industries, services and capital market, as well as credit or debt to other countries.
According to the economists, it is very preferred to keep a zero balance of the current account. However, it is very difficult to achieve such a situation as real life situation is very difficult for any country. The current account metric is most comprehensive measure of the economic activity as it includes balance of trade as well investment flows of the given country. Moreover, it also includes amount of assets that have been transferred in and outside of foreign hands to cover up the gap among American exports and imports.
The following formula used for measuring the current account balance :CAB=X-M+NY+NCT. (Where X = Exports of goods and services, M = Imports of goods and services, NY = Net income abroad and NCT = Net current transfers.)