WJEC Eduqas Eduqas Component 2 2021-style practice: An economy exports 480 billion of goods and services and imports 520 billion, with net primary and secondary income of - 10 billion. Calculate the current-account balance and state whether it is a deficit or surplus.

A short calculate question. The current-account balance is net trade plus net primary and secondary income. Net trade: exports minus imports, 480 - 520 = - 40 billion (a trade deficit). Adding net income of - 10 billion gives a current-account balance of -40 + (-10) = - 50 billion. The balance is **negative**, so it is a current-account **deficit** of 50 billion. Markers reward the net-trade figure, the addition of net income, and the correct identification of a deficit.

EnglandEconomicsSyllabus dot point

What does the balance of payments record, and why does a persistent current-account deficit matter?

The balance of payments and the current account: the structure of the balance of payments, the components of the current account, the causes and consequences of a current-account deficit or surplus, and the link to other objectives.

An Eduqas A520 answer to the balance of payments, covering its structure (current, capital and financial accounts), the four components of the current account, the causes and consequences of a current-account deficit or surplus, and how external balance interacts with growth, the exchange rate and other macroeconomic objectives.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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Quick answer

The balance of payments records all financial transactions between a country and the rest of the world over a period. It has three parts: the current account (trade in goods and services, plus primary income such as investment income and secondary income such as transfers), the capital account (small, covering capital transfers), and the financial account (investment flows: foreign direct investment, portfolio investment and reserves). The whole balance of payments must balance: a current-account deficit is financed by a surplus on the financial account (the country borrows or sells assets to foreigners). The current account has four components: trade in goods, trade in services, primary income and secondary income. A deficit means spending abroad exceeds earnings; it can reflect weak competitiveness or strong investment-led growth. Its seriousness depends on its size, cause, persistence and financing. External balance interacts with growth, the exchange rate and inflation.

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What this dot point is asking
The structure of the balance of payments
The components of the current account
Causes and consequences of a deficit or surplus
Links to other objectives
Examples in context
Try this

What this dot point is asking

Eduqas wants you to set out the structure of the balance of payments, identify the components of the current account, explain the causes and consequences of a current-account deficit or surplus, and link external balance to the other macroeconomic objectives. A satisfactory balance of payments (especially on the current account) is one of the four core objectives.

The structure of the balance of payments

The components of the current account

Causes and consequences of a deficit or surplus

Causes of a deficit include poor price and non-price competitiveness (high relative inflation or costs, low quality), a strong exchange rate (making exports dear and imports cheap), strong domestic demand sucking in imports, and a structural decline in exporting industries. Consequences of a large, persistent deficit can include reliance on capital inflows to finance it, rising external debt, downward pressure on the exchange rate, and a possible loss of confidence; however, a deficit driven by importing capital goods for investment, or easily financed by inflows into an attractive economy, may be benign. A surplus can signal competitiveness but, if very large, may reflect weak domestic demand and create tensions with trading partners.

Constructing a current-account balance

Step 1: state the data

For one year (in billions of pounds): exports of goods 300, imports of goods 380; exports of services 200, imports of services 150; net primary income +20; net secondary income -15.

Step 2: find the trade balances

Trade in goods: $300 - 380 = -80$ (a goods deficit). Trade in services: $200 - 150 = +50$ (a services surplus). Net trade overall: $-80 + 50 = -30$ .

Step 3: add the income components

Add net primary income (+20) and net secondary income (-15): $-30 + 20 - 15 = -25$ .

Step 4: interpret

The current-account balance is $-\pounds 25$ billion, a deficit. It is driven by the goods deficit, partly offset by the services surplus and net investment income. This mirrors the UK pattern: a large goods deficit, a services surplus, and a current-account deficit overall, financed by the financial account.

Links to other objectives

External balance does not stand alone. Fast growth tends to worsen the current account (more imports); a depreciation of the exchange rate tends to improve it over time (cheaper exports, dearer imports), subject to the Marshall-Lerner condition (that the combined elasticities of demand for exports and imports exceed one) and the J-curve effect (the balance worsens before it improves). Reducing a deficit by cutting demand can raise unemployment, while higher import prices from a depreciation can raise inflation. These trade-offs make the current account a recurring evaluation theme.

Examples in context

The UK current account. A persistent deficit, with a goods deficit offset by a services (especially financial) surplus, financed by capital inflows.
Germany and China. Large, persistent current-account surpluses reflecting strong export competitiveness, a source of global imbalances.
Sterling depreciation. After the 2016 referendum, a weaker pound was expected to improve the current account over time, illustrating the J-curve and Marshall-Lerner ideas.

Try this

Q1. State the four components of the current account of the balance of payments. [4 marks]

Cue. Trade in goods, trade in services, primary income (investment income), and secondary income (current transfers).

Q2. Explain one reason why a current-account deficit might not be a serious problem. [4 marks]

Cue. It may finance investment (imported capital goods raising future growth), or be easily financed by capital inflows into an attractive economy, or self-correct via a depreciation.

Exam-style practice questions

Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Eduqas Component 2 20214 marksAn economy exports

\pounds 480

billion of goods and services and imports

\pounds 520

billion, with net primary and secondary income of

-\pounds 10

billion. Calculate the current-account balance and state whether it is a deficit or surplus.

Show worked answer →

A short calculate question. The current-account balance is net trade plus net primary and secondary income.

Net trade: exports minus imports, $480 - 520 = -\pounds 40$ billion (a trade deficit). Adding net income of $-\pounds 10$ billion gives a current-account balance of $-40 + (-10) = -\pounds 50$ billion.

The balance is negative, so it is a current-account deficit of $\pounds 50$ billion. Markers reward the net-trade figure, the addition of net income, and the correct identification of a deficit.

Eduqas Component 3 (macro) 202212 marksEvaluate the view that a persistent current-account deficit is always a serious problem for an economy.

Show worked answer →

A levels-of-response essay. Knowledge and application: explain that a current-account deficit means the country spends more on imports and income outflows than it earns, financed by a surplus on the financial account (borrowing or selling assets to foreigners).

Analysis: develop why a large persistent deficit can be a problem: it may reflect poor competitiveness, must be financed by capital inflows or running down reserves, can lead to rising external debt and a falling exchange rate, and may be unsustainable.

Evaluation: weigh the counter-arguments: a deficit can reflect strong growth and investment (importing capital goods), can be financed easily if the country is attractive to investors, and may self-correct through the exchange rate (a depreciation improves competitiveness, subject to the Marshall-Lerner condition). Conclude with a supported judgement that it depends on the size, cause, persistence and how it is financed.

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Sources & how we know this

Eduqas A Level Economics Specification (A520) — Eduqas (2015)