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How do we record a country's trade with the rest of the world?

The balance of payments and the current account, the meaning of a trade surplus and deficit, and the causes and consequences of a trade imbalance.

An OCR J205 answer on the balance of payments and current account: the trade balance, surpluses and deficits, and the causes and consequences of a trade imbalance.

Generated by Claude Opus 4.89 min answer

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  1. What this dot point is asking
  2. The balance of payments and current account
  3. Surpluses and deficits
  4. Causes of a trade imbalance
  5. Consequences of a trade imbalance
  6. Try this

What this dot point is asking

OCR wants you to explain the balance of payments and the current account, define a trade surplus and deficit, and set out the causes and consequences of a trade imbalance. This is how a country's trade with the world is recorded.

The balance of payments and current account

The current account is in surplus if a country earns more from exports than it spends on imports, and in deficit if it spends more on imports than it earns from exports.

Surpluses and deficits

For example, exports of £250\pounds 250 billion and imports of £200\pounds 200 billion give a balance of 250−200=+£50250 - 200 = +\pounds 50 billion, a surplus.

Causes of a trade imbalance

A current account deficit can arise because:

  • the country's goods are uncompetitive (higher prices or lower quality than rivals),
  • a strong exchange rate makes exports expensive abroad and imports cheap,
  • high domestic demand pulls in more imports,
  • the country lacks industries to make certain goods, so it must import them.

A surplus arises from the opposite: competitive exports, a weaker currency, or strong demand abroad for the country's goods.

Consequences of a trade imbalance

A persistent deficit has consequences:

  • the country spends more abroad than it earns, so it must borrow from abroad or run down reserves to pay for it,
  • over time this can build up external debt,
  • it can put downward pressure on the exchange rate and may reflect uncompetitive industries.

A persistent surplus is not always good either: it can mean domestic consumers are missing out, or that trading partners resent the imbalance.

Try this

Q1. Define a trade deficit. [2 marks]

  • Cue. When the value of a country's imports exceeds the value of its exports (more money flows out than in).

Q2. A country exports £90\pounds 90 billion and imports £75\pounds 75 billion. Calculate the balance of trade and state the position. [2 marks]

  • Cue. 90−75=+£1590 - 75 = +\pounds 15 billion, a trade surplus.

Exam-style practice questions

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

OCR J205/02 20204 marksA country exports £300\pounds 300 billion of goods and imports £380\pounds 380 billion of goods. Calculate the balance of trade in goods and state whether it is a surplus or deficit.
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A Calculate question. The balance of trade in goods is exports minus imports: £300 bn−£380 bn=−£80 bn\pounds 300\text{ bn} - \pounds 380\text{ bn} = -\pounds 80\text{ bn}.

Because imports exceed exports, the balance is negative, so it is a trade deficit of £80\pounds 80 billion. Markers reward the correct subtraction, the negative result, and the word deficit (imports greater than exports).

OCR J205/02 20226 marksExplain the causes and one consequence of a current account deficit.
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A 6 mark question on a trade imbalance.

Causes: a country may import more than it exports because its goods are uncompetitive (higher prices or lower quality), because a strong exchange rate makes exports dear and imports cheap, because of high domestic demand sucking in imports, or because it lacks certain industries.

A consequence is that the country is spending more abroad than it earns, which must be financed by borrowing from abroad or running down reserves; over time this can build up debt and may weaken the currency. Markers reward at least two causes and a clear consequence such as the need to borrow from abroad.

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