The current account — four parts
The BoP (balance of payments) records all transactions with the rest of the world. At IGCSE the focus is the current account: visible trade (goods exports minus imports) and invisible trade (services, investment income, and current transfers like remittances and aid). Visible + invisible = the current account balance — a surplus if inflows exceed outflows, else a deficit. The financial and capital accounts are not required here.
Causes of a current account deficit
A current account deficit (import payments exceeding export receipts) has several causes: high consumer spending pulling in imports; an overvalued exchange rate making exports dear and imports cheap; low competitiveness (higher cost or lower quality than rivals); strong growth raising import demand faster than export capacity; a weak supply-side limiting what can be exported. Each cause needs a different cure — separate cause from consequence.
Policies to correct a deficit
Four approaches. Depreciation: a weaker currency makes exports cheaper and imports dearer, helping if demand is elastic (PED (price elasticity of demand) above 1). Protectionism: tariffs and quotas cut imports but risk retaliation and higher prices. Deflationary demand management: tighter policy cuts incomes and imports, but growth slows. Supply-side policies: raise productivity — a longer-run fix. Match the policy to the cause.
Drawn from real examiner reports.
Write the unit and surplus/deficit
On a BoP (balance of payments) calculation, a correct number with no unit loses a mark. State the value, the currency unit (e.g. bn), and whether it is a surplus or a deficit. Show your working too: an incorrect final answer with correct working still earns 1 mark, but an answer with no unit cannot score full marks even if the arithmetic is right.
November 2024 Paper 2, Q1(e): many candidates lost 1 mark by omitting the currency symbol and/or the bn unit from the invisible trade balance calculation.
Visible and invisible trade differ
The visible trade balance is goods only; the invisible trade balance is services, income and transfers — do not merge them. A second slip adds the balances with the wrong signs (treating a visible deficit as positive). Work in order: visible = goods exports − imports; invisible = receipts − payments; current account = visible + invisible, keeping every sign.
Frequent in BoP calculation questions across multiple sittings — candidates conflate categories or apply incorrect signs.
Define FDI in two parts
Defining FDI (foreign direct investment) by re-ordering the words earns little. Give both parts: (1) investment by a firm in productive assets (factories, offices) (2) in a different country from the investing firm. Naming a feature without both parts misses marks. The same two-part rule fits 'current account' or 'trade surplus'.
June 2024 Paper 2, Q2(d): very few candidates gave an accurate two-part definition of FDI — most restated the term without defining it.
A trade deficit is not a budget deficit
These are different deficits. A current account (trade) deficit means import payments exceed export receipts (a flow with the rest of the world). A government budget deficit means the state spends more than it raises in tax — a domestic public-finance gap. A country can run one without the other — name which deficit a question means first.
A short-run deficit is not failure
Treating any current account deficit as proof the economy is failing loses balance marks. A persistent deficit is a genuine concern (rising foreign debt, currency pressure), but short-run deficits are normal for a growing economy whose high incomes pull in imports and whose firms are investing. Judge a deficit by its size, cause and persistence, not by its sign alone.
Depreciation corrects the CA only if elastic
Depreciation does not automatically fix a deficit. It improves the current account only if demand is price-elastic (the Marshall-Lerner condition). If demand is inelastic it can widen the deficit, and the J-curve means it worsens first. State the elasticity condition, not just 'depreciation improves the balance'.
Assess: mechanism, limit, judgement
For a 12-mark BoP-policy Assess: define it → mechanism (depreciation → exports cheaper → export revenue up, if PED (price elasticity of demand) elastic) → limitation (J-curve, retaliation) → a judgement fitting the cause. Use, don't copy, data.
Calculate the CA in three steps
Do a current account calc in order: (1) visible = goods exports − imports; (2) invisible = receipts − payments; (3) current account = visible + invisible. Keep every sign, then write the unit and 'surplus' or 'deficit'. Steps bank method marks even if a figure is wrong.
Match the policy to the cause
Diagnose the cause of the deficit before choosing a policy. An overvalued currency points to depreciation; low competitiveness to supply-side reform; an import boom to demand management. Matching the cure to the cause — and saying why — lifts the answer into the top band.
Separate cause from consequence
BoP questions ask for either a cause or a consequence of a deficit — answer the one asked. A cause is why it arose (weak competitiveness, an import boom); a consequence is what follows (currency pressure, rising foreign debt). Answering the wrong one scores nothing.
The BoP (balance of payments) is a systematic record of all economic transactions between residents of a country and the rest of the world over a set period (usually one year). At IGCSE level, the focus is on the current account (CA).
| Component | Definition | Sign |
|---|---|---|
| Visible trade balance | Exports of goods minus imports of goods | + if surplus, – if deficit |
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