The current account and its structure
The current account (CA) is the largest part of the balance of payments (BoP) — a record of a country's trade and income flows with the rest of the world (not borrowing or investment). Its four components: trade in goods (visibles); trade in services (invisibles — tourism, banking); primary income (profits, interest, dividends); and secondary income (transfers — aid, remittances). Balance = credits (money in) − debits (money out).
Deficit, surplus and the sign
A current-account deficit means money flowing out (debits, e.g. import spending) exceeds money flowing in (credits, e.g. export earnings) — the balance is negative. A surplus is the reverse (credits > debits, positive). Balance means credits = debits. The figure is often quoted as a percentage of GDP so different-sized countries can be compared: a negative % is a deficit, a positive % a surplus (e.g. −5% of GDP is a deficit, +6% a surplus).
Causes of a deficit or surplus
It turns on the value of exports relative to imports. Deficit causes (imports worth more): high incomes/growth, high prices/inflation, a strong currency (exports dear, imports cheap), or low productivity/quality. Surplus causes (exports worth more): low prices/inflation or a weak currency, high productivity/quality, or low home demand (recession) cutting imports. A surplus needs export VALUE to exceed import value, not dearer exports.
Drawn from real examiner reports.
Current account ≠ government budget
The commonest error is treating a current-account deficit like a government budget deficit. The current account compares imports with exports — an international balance. A budget deficit is the government spending more than it raises in tax. On a current-account question, write about exports, imports and income flows, not tax and spending.
November 2022 Paper 2 Q1(e)/Q1(g)/Q5(b): recurring confusion between a government budget deficit and a current-account deficit; some candidates wrote about government spending and tax revenue. June 2023 Q3(c) repeated this confusion.
Analyse the data, don't describe it
Given current-account data (often % of GDP with inflation), analyse it — state the relationship or trend and any exception — do not just repeat numbers. Weak: quoting one country's figures. Strong: "the highest-inflation country had the largest deficit, an inverse relationship, with X an exception." State the direction, support with figures, name the exception.
June 2022 Paper 2 Q1(f) and November 2022 Paper 2 Q1(f): many candidates simply described the percentages rather than analysing the inverse relationship between inflation and the current-account balance and identifying exceptions.
Surplus = higher value, not dearer
A surplus does not arise because exports become more expensive. It requires the total value of exports (price × quantity) to exceed the total value of imports. Exports usually earn more when they are cheaper or better quality, not dearer. Point to causes that raise export earnings or cut import spending.
June 2022 Paper 2 Q2(b): candidates often explained why exports were more expensive rather than why the total value of exports exceeded the total value of imports.
Negative % of GDP means a deficit
In data on the current account as a percentage of GDP, a negative percentage is a deficit and a positive percentage is a surplus. Many candidates read this backwards. Before analysing, label each figure: −4% of GDP is a deficit, +4% is a surplus. A larger negative number is a bigger deficit, not a smaller one.
June 2022 Paper 2 Q1(f): many candidates did not understand that a negative percentage of GDP meant a current-account deficit and a positive percentage a surplus.
Not a bank current account
The current account of the balance of payments is a national record of trade and income flows with the rest of the world. It has nothing to do with the current account a person holds at a commercial bank. A few candidates confuse the two. Always anchor your answer to a country's exports, imports and income flows.
November 2022 Paper 2 Q1(g): a small number of candidates confused the current account of the balance of payments with a commercial bank current account.
A deficit is not always a problem
Do not assume every current-account deficit is bad. Whether it matters depends on its size, how long it lasts and why it exists. A small, short-lived deficit from importing capital equipment for growth, or from a consumer boom, is far less worrying than a large, persistent one caused by poor competitiveness. Judge a deficit by its cause and sustainability.
The Paper 2 (a)–(d) ladder
The 0455 Paper 2 ladder: (a) define (2) — precise meaning only; (b) explain (4) — one point developed; (c) analyse (6) — a sustained one-sided chain, no evaluation; (d) discuss (8) — both sides plus a supported judgement.
Structure a deficit-policy (d)
For a discuss on cutting a deficit, name a policy (depreciation, higher rates, tariffs), give a chain showing how it reduces the deficit (weaker currency → cheaper exports, dearer imports), develop drawbacks (inflation, retaliation, elasticity), then judge.
Anchor to trade and income flows
Every point on a current-account question must be about exports, imports, trade and income flows — never government tax-and-spend. If you write about tax or government spending, you have drifted into the budget deficit and are answering the wrong question.
Analyse data in three steps
On data-response, do not describe the table. State the overall relationship (e.g. an inverse link between inflation and the balance), support it with figures from the source, and name any exception. Three steps turn description into the analysis the marks reward.
The balance of payments (BoP) is a record of all financial transactions between a country and the rest of the world over a period of time. Its biggest part — the one the 0455 syllabus focuses on — is the current account (CA).
The current account records flows arising from trade and income, NOT borrowing, lending or long-term investment (those belong in the financial and capital accounts).
| Component | What it records | Examples |
|---|
Full notes, flashcards, Q&A and the topic quiz for every premium subject.
Premium plans are US$8.99/month or US$49.99/year — first month free.
Studying with a parent's blessing? Show them this.
