Current Account of the Balance of Payments
International Trade & Globalisation · 2 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 5% of your exam marks.
New emphasis in the 2027 syllabus; the structure of the current account and the causes, consequences and correction of deficits and surpluses are examined directly. Guidance based on specimen materials.
A government worried about a large current-account deficit (or an excessive surplus) can use several policies. They aim either to switch spending away from imports and toward exports, or to reduce total spending.
- Trade restrictions. Tariffs and quotas on imports reduce import spending and protect the trade balance, but trading partners may retaliate and reduce the country's exports, so the gain may be smaller than hoped.
- Allowing or encouraging a lower exchange rate. A depreciation makes exports cheaper abroad and imports dearer at home, narrowing a deficit, though it also raises import prices and can add to inflation.
- Reducing total demand (contractionary fiscal or monetary policy). Higher taxes or interest rates cut spending, including on imports, but this also slows growth and can raise unemployment.
- Supply-side policies. Improving productivity, skills and quality makes a country's goods more competitive, raising exports and reducing imports over the long run. This avoids the costs of the other policies but works slowly.
Most governments combine measures: demand-side or exchange-rate policy for a quick effect on the deficit, and supply-side policy to improve competitiveness over time. Each policy has a cost (retaliation, inflation, slower growth or a long time-lag), so the right choice depends on why the imbalance exists and how urgent it is.
Analyse policies to reduce a current-account deficit (6 marks)
What comes up: a 6-mark "Analyse how a government could reduce a deficit on the current account." Each chain identifies a policy (1) and develops how it improves the balance (1).
Write: develop two or three chains, for example: (1) impose tariffs or quotas (1): this raises the price of imports or limits their quantity, so import spending falls and the deficit narrows (1); (2) allow the exchange rate to fall (1): a depreciation makes exports cheaper abroad and imports dearer at home, so exports rise and imports fall (1); (3) use supply-side policy to raise productivity and quality (1): more competitive goods raise exports and reduce reliance on imports (1); (4) raise interest rates / taxes to reduce total demand (1): lower spending reduces demand for imports (1).
Watch out: for each policy add the cost or limitation (retaliation, higher inflation, slower growth, time-lag), which is what a "discuss" version of the question rewards, and link every chain back to imports or exports rather than stopping at the policy.