Paper 2 and Paper 3 give a table and ask for a balance, every year.
Our example: a current account, row by row
| Item ($ billion) | Credit | Debit | Balance |
|---|---|---|---|
| Trade in goods | 80 | 95 | −15 |
| Trade in services | 30 | 22 | +8 |
| Income | 6 | 10 | −4 |
| Current transfers | 5 | 2 | +3 |
| Current account | −8 |
The calculations
Balance of trade in goods
Goods exports − goods imports: 80 − 95 = −$15 billion.
Balance of trade in services
30 − 22 = +$8 billion.
Current account balance
Add the four balances: −15 + 8 − 4 + 3 = −$8 billion: a deficit.
A missing balance
Current account −8, goods −15, income −4, transfers +3: services = −8 + 15 + 4 − 3 = +$8 billion.
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The whole balance of payments always adds up to zero.
Why the accounts sum to zero
Every payment is paid for
A $8 billion current account deficit must be financed.
By money coming in
Foreigners invest or lend: a financial account surplus of $7 billion, a capital account surplus of $1 billion.
So the total is zero
−8 + 1 + 7 = 0. Any gap is errors and omissions.
The points to remember
- Write it like this: "A current account deficit is matched by a surplus on the financial and capital accounts."
- Current + capital + financial (+ errors and omissions) = 0.
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Paper 2 asked this in November 2024, for 4 marks.
Text A says foreign firms invested heavily in new factories, and Table 4 shows a current account deficit of $8 billion.
Using the data, explain the interdependence between the accounts in the country's balance of payments.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Where marks are lost
No sign
Write −$8 billion, or "a deficit of $8 billion".
No units
$ billion: write both.
Wrong account
FDI is financial account, not current account.