Edexcel International A Level Economics
Edexcel International A Level Economics Balance of Payments, Exchange Rates and International Competitiveness Exam Questions
Free Edexcel International A Level Economics exam questions for Balance of Payments, Exchange Rates and International Competitiveness, with a mark scheme for every pack. Covers the balance of payments, current account imbalances, exchange rate systems, factors affecting exchange rates and international competitiveness.
Balance of Payments, Exchange Rates and International Competitiveness exam questions
1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
About Edexcel International A Level Economics Balance of Payments, Exchange Rates and International Competitiveness
This Unit 4 topic in Edexcel International A Level Economics looks at how countries record their transactions with the rest of the world, how exchange rates are determined and why some countries are more internationally competitive than others. You study the components of the balance of payments, the causes and consequences of current account deficits and surpluses, and the policies used to correct imbalances. You compare floating, fixed and managed exchange rate systems and analyse the effects of currency changes. Finally, you look at measures and determinants of competitiveness. Examiners expect exchange rate diagrams and evaluation using the Marshall-Lerner condition and J-curve.
What you need to know
- The balance of payments The current account records trade in goods and services, primary income and secondary income. The capital and financial accounts record flows such as FDI, portfolio investment and changes in reserves.
- Current account imbalances Deficits can be caused by low productivity, high inflation, a strong currency or rapid growth in incomes. Policies to reduce a deficit include expenditure-switching policies such as devaluation or protectionism, expenditure-reducing policies, and supply-side policies.
- Exchange rate systems Floating exchange rates are set by market forces; fixed rates are pegged by the central bank; managed rates float within limits. Know revaluation and devaluation versus appreciation and depreciation.
- Factors affecting exchange rates Relative interest rates, relative inflation rates, speculation, trade flows, FDI and central bank intervention.
- Effects of exchange rate changes A depreciation makes exports cheaper and imports dearer. The Marshall-Lerner condition says this improves the current account if PED for exports + PED for imports is greater than 1; the J-curve shows the current account may worsen first.
- International competitiveness Measured by relative unit labour costs and relative export prices. Determined by productivity, wage costs, exchange rates, regulation, infrastructure and quality.
Common mistakes in Balance of Payments, Exchange Rates and International Competitiveness
- Confusing depreciation and devaluation. Depreciation is a fall in a floating exchange rate; devaluation is a deliberate reduction in a fixed rate.
- Placing FDI in the current account. FDI is in the financial account; only income from it appears in the current account as primary income.
- Saying a current account deficit is always bad. It may reflect strong consumer spending or be financed by inward investment; the cause and size matter.
- Forgetting the Marshall-Lerner condition. A depreciation will not improve the current account if demand for exports and imports is inelastic.
- Equating competitiveness only with low wages. Productivity, quality, innovation and infrastructure also matter.
Try three Balance of Payments, Exchange Rates and International Competitiveness exam-style questions
1. Exports are 450 billion dollars, imports are 510 billion dollars, net primary income is +25 billion and net secondary income is -10 billion. Calculate the current account balance. (2 marks)
Show the mark scheme answer
(450 - 510) + 25 - 10; = -45 billion dollars, a deficit of 45 billion.
2. With the help of a diagram, explain how an increase in interest rates may affect the exchange rate. (4 marks)
Show the mark scheme answer
Higher interest rates attract hot money inflows; demand for the currency increases; demand curve shifts right; exchange rate appreciates; diagram showing new higher equilibrium.
3. Evaluate the use of devaluation as a policy to reduce a current account deficit. (12 marks)
Show the mark scheme answer
Devaluation makes exports cheaper and imports dearer, improving price competitiveness and raising net exports; evaluation: Marshall-Lerner condition must be met; J-curve shows short-run worsening; higher import prices cause cost-push inflation; may provoke retaliation; does not address non-price competitiveness; supply-side policies may be more sustainable; supported judgement.
Balance of Payments, Exchange Rates and International Competitiveness FAQs
What does Edexcel IAL Economics Balance of payments, exchange rates and international competitiveness cover?
It covers the balance of payments, current account imbalances, exchange rate systems and changes, and measures and causes of international competitiveness.
Which unit is this topic examined in?
It is part of Unit 4, Developments in the global economy.
What is the Marshall-Lerner condition?
It states that a depreciation or devaluation improves the current account only if the sum of the price elasticities of demand for exports and imports is greater than 1.
