WJEC A Level Economics
WJEC A Level Economics The Balance of Payments Exam Questions
Free WJEC A Level Economics revision for The Balance of Payments: what you need to know, common mistakes and exam-style questions with answers. Covers measuring the balance of payments, the terms of trade, causes and impacts of current account imbalances and solutions.
Practise The Balance of Payments with past papers
Once you have learnt this topic, find the The Balance of Payments questions in real WJEC A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About WJEC A Level Economics The Balance of Payments
The balance of payments is an A2 macroeconomic objective in WJEC Economics. The specification covers measurement, the causes of current account imbalances, their impacts, and solutions to current account deficits. You need to understand that the balance of payments sums to zero overall, so a current account deficit is matched by flows on the capital and financial accounts, and to calculate a terms of trade index. Detailed knowledge of the sub-accounts is not required. You explain causes such as productivity, factor costs, exchange rates, industrial structure and commodity prices, and evaluate solutions including exchange rate policy, deflationary policy, supply side reform and protectionism. It is examined in A2 Units 3 and 4.
What you need to know
- Measurement The balance of payments records all financial transactions between a country and the rest of the world. The current account covers trade in goods and services and income flows; the capital and financial accounts cover flows of investment and other assets.
- It always balances Overall the accounts sum to zero. A current account deficit must be financed by net inflows on the financial account, such as foreign direct investment or overseas purchases of UK shares and bonds.
- Terms of trade Terms of trade = (average export price index / average import price index) x 100. A rise means an improvement, so a given volume of exports pays for more imports.
- Causes of imbalances Low productivity, high factor costs, an overvalued exchange rate, an industrial structure weighted away from manufacturing, rising commodity import prices, protection abroad and comparative advantage. Structural deficits persist even at trend output; cyclical deficits grow in booms.
- Impacts A large, persistent deficit can reduce AD and employment in exporting sectors, increase foreign ownership of domestic assets, put pressure on the exchange rate and rely on continued investor confidence.
- Solutions Expenditure switching (depreciation, devaluation, protectionism), expenditure reducing (deflationary fiscal or monetary policy) and supply side policies to raise competitiveness. Each has costs, such as inflation, lower growth or retaliation.
Common mistakes in The Balance of Payments
- Writing about a balance of payments deficit. Strictly, the deficit is on the current account; the whole balance of payments balances.
- Learning detailed sub-account definitions instead of the economics. WJEC states detailed sub-account knowledge is not needed; focus on causes, impacts and solutions.
- Assuming an improvement in the terms of trade improves the current account. Higher export prices may reduce export volumes if demand is elastic.
- Recommending deflationary policy without its cost. Reducing AD to cut imports also reduces growth and employment.
Try three The Balance of Payments exam-style questions
1. Average export prices rise by 5% and average import prices rise by 12% from a base year of 100. Calculate the new terms of trade index. (2 marks)
Show the mark scheme answer
105 / 112 x 100; = 93.75 (93.8), a deterioration.
2. Explain two possible causes of a UK current account deficit. (4 marks)
Show the mark scheme answer
High consumer spending with a high propensity to import, so imports grow faster than exports; low productivity growth relative to competitors raises unit costs and reduces export competitiveness; (or a strong pound, decline in manufacturing, higher commodity import prices).
3. Evaluate the use of a depreciation of the currency to reduce a current account deficit. (15 marks)
Show the mark scheme answer
A strong answer would explain that depreciation lowers export prices abroad and raises import prices, switching expenditure; analyse the Marshall-Lerner condition and J-curve; evaluate imported inflation, retaliation, non-price competitiveness, inelastic demand for imported commodities and short term gains if costs rise; compare with supply side policy; reach a judgement.
The Balance of Payments FAQs
What does WJEC A Level Economics The Balance of Payments cover?
It covers measuring the balance of payments and why it balances, the terms of trade, the causes and impacts of current account imbalances and solutions to current account deficits.
Which unit is The Balance of Payments examined in?
It is A2 content, so it is examined in A2 Unit 3 (Exploring Economic Behaviour) and A2 Unit 4 (Evaluating Economic Models and Policies).
What should I focus on when revising the balance of payments?
Focus on the causes and consequences of current account deficits and surpluses and how to evaluate solutions. Practise the terms of trade calculation and link the topic to exchange rates and competitiveness.
