9708 · 6.3
Current account of the balance of payments flashcards
Revision flashcards for Cambridge 9708 Current account of the balance of payments (syllabus 6.3). Flip, recall, then mark a real past-paper question.
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Four components of the current account?
Trade in goods, trade in services, primary income (investment income, wages), and secondary income (transfers e.g. remittances, aid).
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Balance of trade in goods?
Value of exports of goods minus value of imports of goods (visible trade balance).
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Current account deficit?
Total debits exceed total credits on the current account — country spends more abroad than it earns from abroad.
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How does net export link to AD?
AD = C + I + G + (X − M). Higher (X − M) boosts AD; a current account deficit may mean M > X, reducing AD contribution.
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Causes of a current account deficit?
Strong currency, high domestic demand (imports rise), low competitiveness, high relative inflation, and growth differentials.
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How is a current account deficit financed?
Capital and financial account inflows (foreign investment, borrowing), or drawing down foreign exchange reserves.
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What are the four components of the current account of the balance of payments?
1. Balance of trade in goods (visible trade) 2. Balance of trade in services (invisible trade) 3. Net primary income (e.g., profits, interest, dividends) 4. Net secondary income (e.g., aid, remittances)
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How does a current account surplus affect aggregate demand (AD)?
A surplus implies that export revenues are greater than import expenditures (X>M). This means net exports (X-M) are positive, representing a net injection into the circular flow of income. This causes the AD curve to shift to the right.
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Define 'primary income' in the context of the current account.
Primary income is the net flow of income resulting from the cross-border ownership of factors of production. It includes profits, interest, and dividends earned on foreign assets (credits) minus those paid to foreign owners of domestic assets (debits).
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Is a UK citizen's holiday in France recorded as a credit or a debit on the UK's current account?
It is a debit. The citizen is spending money abroad, which represents an outflow of funds from the UK to purchase a service (tourism) from France. It is an import of a service.
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What is the difference between the 'balance of trade' and the 'current account balance'?
The balance of trade only includes the value of exported and imported goods and services. The current account balance is broader; it includes the balance of trade PLUS net primary and net secondary income flows.