9708 · 6.3

Current account of the balance of payments — practice questions

Practice and worked examples for 9708 Current account of the balance of payments. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Country R ($ billion):

- Exports of goods: 80	Imports of goods: 110
- Exports of services: 45	Imports of services: 30

Net primary income: −15
Net secondary income: −5

(a) Calculate the balance of trade in goods. (b) Calculate net exports (goods and services). (c) Calculate the current account balance. (d) If GDP is $500bn, express the current account as a % of GDP.

Show solution outline

(a) Balance of trade in goods = 80 − 110 = −$30 billion (goods trade deficit)

(b) Net exports (goods + services) Total X = 80 + 45 = 125; Total M = 110 + 30 = 140 (X − M) = 125 − 140 = −$15 billion

(c) Current account balance = (X − M) + Primary income + Secondary income = −15 + (−15) + (−5) = −$35 billion (current account deficit)

(d) % of GDP = (35 ÷ 500) × 100 = 7.0% of GDP deficit

Worked example 2

Country R has a current account deficit and unemployment above NAIRU. Policymakers consider depreciation and expansionary fiscal policy.

(a) Show how depreciation affects (X − M) and AD. (b) Show how expansionary fiscal policy affects AD and the current account. (c) Which policy better addresses both unemployment and the deficit?

Show solution outline

(a) Depreciation Currency falls → exports cheaper abroad, imports dearer at home → X↑, M↓ → (X − M) rises → AD increases (if Marshall-Lerner holds) → unemployment may fall.

(b) Expansionary fiscal policy ↑G or ↓T → AD shifts right → Y and C rise → M increases (marginal propensity to import) → (X − M) may worsen → current account deficit widens while unemployment falls.

(c) Evaluation Depreciation helps both unemployment (AD↑) and deficit ((X−M)↑) if elastic — but may worsen cost-push inflation (import prices rise). Fiscal expansion helps unemployment but worsens BOP — conflict between objectives (5.1). Supply-side policy (5.4) may improve competitiveness without the inflation shock.

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