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ExamPass · IGCSE worksheet

The balance of payments

NameClassDate

Key terms

Define each term.

1
Balance of payments

Multiple choice

Circle the correct answer.

2

A country has a deficit on trade in goods of $50bn and a surplus on trade in services of $70bn. Net primary and secondary income are both zero. The current account is:

  1. In deficit by $50bn
  2. In surplus by $20bn
  3. In deficit by $20bn
  4. In surplus by $70bn
3

Which situation makes a current account deficit least worrying?

  1. It is financed by short-term borrowing that can be withdrawn quickly
  2. It results from importing machinery that will raise future productive capacity
  3. It has persisted and widened for a decade
  4. It results from a loss of competitiveness in export industries

Worked problems

Show your working.

4

Calculating the current account balance from its components. A country records: exports of goods $180bn, imports of goods $220bn, exports of services $95bn, imports of services $60bn, net primary income minus $12bn, net secondary income plus $8bn. Calculate the trade in goods balance, the trade in services balance and the overall current account balance.

Answers

1

Balance of payments: A record of all financial transactions between the residents of a country and the rest of the world over a period of time, usually a year.

2

B. The current account combines all components: minus 50 plus 70 equals plus 20, a surplus of $20bn. A goods deficit does not mean a current account deficit, which is exactly why the question is set this way.

3

B. Importing capital equipment raises future output and export capacity, so the borrowing funds an asset that will help service it. The other three describe deficits that either signal an underlying problem or depend on financing that could disappear at short notice.

4

Step 1. Calculate the balance of trade in goods. 180 - 220 = minus $40bn. A deficit of $40bn on goods.

Step 2. Calculate the balance of trade in services. 95 - 60 = plus $35bn. A surplus of $35bn on services.

Step 3. Combine to get the balance of trade in goods and services. minus 40 + 35 = minus $5bn. The services surplus offsets most but not all of the goods deficit.

Step 4. Add the income balances. minus 5 + (minus 12) + 8 = minus $9bn. The current account is in deficit by $9 billion.

Step 5. Interpret the structure. This economy imports more goods than it exports but is a net exporter of services, which is typical of an advanced economy with a large financial or tourism sector. The negative primary income means more profit and interest leaves the country than enters, suggesting foreign ownership of domestic assets exceeds domestic ownership abroad.

Keep signs consistent throughout and show each stage. Method marks are available for the intermediate balances, so a single arithmetic slip costs one mark rather than the question.