Current Account of the Balance of Payments
International Trade & Globalisation
The balance changes whenever the value of what a country sells abroad changes relative to what it buys.
Causes of a current-account deficit
- Low international competitiveness. If domestic goods are more expensive or lower quality than foreign rivals, exports fall and imports rise. This can come from high relative inflation, low productivity or a high exchange rate.
- Strong domestic demand. When incomes and spending are high, people buy more imports, widening the deficit.
- A high exchange rate. A strong currency makes exports dear abroad and imports cheap at home, worsening the trade balance.
- Reliance on imported essentials. A country that must import much of its food, fuel or raw materials runs a structural import bill.
Causes of a current-account surplus
The opposite conditions: high competitiveness from low costs, high productivity or a low exchange rate; weak domestic demand that holds imports down; or a strong base of exports such as commodities, manufactured goods or services like tourism and finance.
Common exam question
Why the current account improves or worsens
Question: Analyse how higher productivity or technology can improve the current account, or why a country may buy more imports (4–6 marks).
Build a chain that ends on the balance: productivity or technology lowers costs, so prices fall or quality rises; exports become more competitive, so demand and export revenue rise; spending on imports falls. Each link earns a mark: do not stop at "more competitive". Asked in 4 of the 11 structured papers.
For more imports, credited causes include cheaper imports (a stronger currency, lower foreign costs), higher incomes, removed tariffs or quotas, and materials it lacks; naming them alone was capped at three marks. A 4-mark data version paired the oil price with an oil exporter's balance: say they move together, cite years, and explain that inelastic demand makes dearer oil raise export revenue.
Set in 1 of the 13 multiple-choice papers: the key for a bigger surplus was lower export prices; the rest work the other way.