AQA A-level Economics: The balance of payments and correcting imbalances (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (7135 and 7136), version 1.3, sub-section “The balance of payments” (4.2.6.3 in the combined PDF; 3.2.6.3 on the AQA website and this site’s map). Every country and figure is invented for illustration. Learn the ideas first in the study guide and the revision notes. The AQA A-level Economics hub and checklist show the wider course, and the free diagnostics test where to start.

Questions

1. Country X records three transactions. Identify the current account component (goods, services, primary income or secondary income) in which each appears. (i) Wages earned by X’s residents who work abroad. (ii) Spending by overseas visitors in X’s hotels. (iii) A government grant paid by X to an overseas disaster fund. [3]

2. Country P’s figures for one year are below (cu bn, illustrative).

Item	Earned	Paid
Goods	188	231
Services	97	64
Primary income	41	58
Secondary income	12	27

Calculate the balance for each component, the current account balance, and the trade balance (goods and services). [4]

3. Distinguish between foreign direct investment and portfolio investment, giving an example of each. [3]

4. In Country F, labour costs 18 per hour and output is 9 units per hour. A year later wages have risen 6% and output per hour 3%.

(a) Calculate unit labour cost in each year and the percentage change. [3] (b) Explain how this change, relative to competitors, affects the current account. [2]

5. Country G’s inflation is 2% and its trading partners’ is 5%. The exchange rate is unchanged.

(a) Calculate the change in G’s prices relative to its partners’. [2] (b) Explain the likely effect on G’s current account. [1] (c) State the exchange rate change that would cancel this effect. [1]

6. Country H’s exports are 250 and imports 300 (cu bn). Its currency falls 10%, raising import prices 10% and lowering export prices abroad 10%. Home-currency export prices are unchanged.

(a) Price elasticity of demand for exports is 0.8 and for imports 0.5. Calculate the new current account balance on goods and services. [4] (b) In the first months the elasticities are 0.2 and 0.1. Calculate the balance and comment. [2]

7. In Country J, saving takes 0.1 of extra income, tax 0.15 and imports 0.25. Government spending is cut by 20 to reduce a current account deficit of 60.

(a) Calculate the multiplier. [1] (b) Calculate the fall in national income. [1] (c) Calculate the fall in imports. [1] (d) Comment on the effectiveness of the policy. [2]

8. Explain the difference between expenditure-switching and expenditure-reducing policies. Give one example and one drawback of each. [6]

9. Country R has a current account deficit of 54 and GDP of 900 (cu bn, illustrative). The deficit is financed by FDI of 40, portfolio inflows of 10 and other lending of 4. Growth is 3.5% and most imports are machinery for new factories. Evaluate whether the deficit is a problem for Country R. [9]

10. Country T depreciates its currency to correct a deficit.

(a) Explain how this could affect inflation and economic growth. [4] (b) Discuss whether the benefit to the current account outweighs these effects. [4]

11. Country M, a large deficit economy, cuts government spending by 50. Its marginal propensity to save is 0.15, marginal rate of tax 0.15 and marginal propensity to import 0.2, all imports come from Country S, whose marginal propensity to save is 0.3, tax rate 0.2 and marginal propensity to import 0.3. Assess the global implications of M’s decision. [12]

Answers

1. (i) Primary income [1]; (ii) trade in services [1]; (iii) secondary income [1]. [3] Examiner insight: Wages from abroad are income for a factor of production, while a grant is a transfer with nothing returned; naming the reason as well as the label protects the mark.

2. Goods 188 − 231 = −43 [1]; services 97 − 64 = +33 [1]; primary 41 − 58 = −17 and secondary 12 − 27 = −15 [1]. Current account = −43 + 33 − 17 − 15 = −42; trade balance = −43 + 33 = −10 [1]. [4] Examiner insight: Showing each component balance makes your method visible and helps you spot your own slips; a bare total hides both.

3. FDI is investment giving lasting interest and control, such as building a factory abroad [1]. Portfolio investment is buying shares or bonds without control, such as a pension fund buying overseas bonds [1]. Portfolio flows are easily reversed, FDI is long-term [1]. [3] Examiner insight: A contrast needs both sides; describing FDI alone, however well, cannot show the distinction.

4. (a) Year 1: 18 ÷ 9 = 2.00 [1]. Year 2: 18 × 1.06 ÷ (9 × 1.03) = 2.058 [1]. Change = +2.9% [1]. (b) Unit costs rise relative to rivals if their costs are steady, so F’s exports become dearer and its imports more attractive [1], so the current account worsens [1]. [5] Examiner insight: “Relative to competitors” in the question signals that rivals’ costs must be mentioned; a rise in costs matters only in comparison.

5. (a) 1.02 ÷ 1.05 [1] = 0.9714, so −2.9% (G’s goods are relatively cheaper) [1]. (b) Exports more competitive and imports less so, so the balance improves [1]. (c) An appreciation of about 2.9% (1.05 ÷ 1.02 = 1.029) [1]. [4] Examiner insight: Check the direction before writing: lower inflation than partners helps competitiveness, and it is easy to reverse this under time pressure.

6. (a) Export volume +8%: 250 × 1.08 = 270 [1]. Import volume −5% [1] and price +10%: 300 × 1.10 × 0.95 = 313.5 [1]. Balance = 270 − 313.5 = −43.5 (improved from −50) [1]. (b) Exports 250 × 1.02 = 255; imports 300 × 1.10 × 0.99 = 326.7; balance −71.7 [1], a worsening: demand is too inelastic in the short run (the J-curve) [1]. [6] Examiner insight: State your assumptions about pass-through and supply; calculations are rewarded for clear working, and the comment must use the figures.

7. (a) 1 ÷ (0.1 + 0.15 + 0.25) = 2 [1]. (b) 20 × 2 = 40 [1]. (c) 0.25 × 40 = 10 [1]. (d) Imports fall by only 10, one sixth of the 60 deficit [1], while output falls 40, raising unemployment, so the policy is costly for a small gain [1]. [5] Examiner insight: Use the numbers in the comment; “it reduces growth” alone does not judge effectiveness.

8. Expenditure-reducing policies cut total demand so fewer imports are bought [1]; an example is raising income tax [1]; the drawback is lower output and higher unemployment [1]. Expenditure-switching moves spending from imports to domestic goods without cutting total demand [1]; an example is depreciation [1]; the drawback is that it may fail if elasticities are low, or raise import prices and inflation [1]. [6] Examiner insight: Each type needs its own mechanism; listing four policies without saying how each works earns little.

9. Deficit = 54 ÷ 900 = 6.0% of GDP [1]. FDI covers 40 of 54, or 74% [1]. FDI brings capital, technology and long-term production [1]. Machinery imports raise productive capacity and may lift future exports and growth [1]. Risks: profits and dividends will flow out as primary income, enlarging future deficits [1]; the 10 of portfolio money could leave quickly, pressuring the currency [1]. Judgement factors: cause, financing mix, whether growth exports follow [1]. Overall, the deficit is less harmful here because it is investment-led and mostly FDI-financed [1], but it becomes a concern if new factories fail to raise exports [1]. [9] Examiner insight: Evaluation earns credit when the judgement rests on the case data, such as the cause and financing, not on a general statement that deficits are bad.

10. (a) Higher import prices raise costs for firms using imported inputs and push up consumer prices, so inflation rises [1][1]. Cheaper exports raise net exports and so aggregate demand, increasing growth [1]; the demand pull can add to inflation [1]. (b) Gains depend on elasticities and time lags [1]. Rising inflation can erode the competitive gain as wages follow prices [1]. Extra growth and jobs are a benefit [1]. Judgement: worthwhile if demand is elastic and inflation contained, otherwise the gain fades [1]. [8] Examiner insight: A chain of reasoning (import price, cost, wages, price) scores better than naming “inflation” as an effect.

11. Multiplier M = 1 ÷ (0.15 + 0.15 + 0.2) = 2 [1]. Income falls 50 × 2 = 100 [1]. Imports fall 0.2 × 100 = 20 [1]. S’s exports fall 20; S’s multiplier = 1 ÷ (0.3 + 0.2 + 0.3) = 1.25, so S’s income falls 20 × 1.25 = 25 [1]. Total income lost 125 for a 20 improvement [1]. If S expands demand, adjustment is shared and world output holds up [1]; if not, the burden falls on deficit economies, a contractionary bias [1]. Currency moves and protection may follow, as partners resist lost exports [1][1]. Interest and capital flows may shift [1]. Judgement: the effect is largest when M is large and S cannot offset it, so the cost depends on S’s response [1][1]. [12] Examiner insight: Both countries’ figures should appear in the answer, and the judgement should name what the outcome depends on.

Where marks are usually lost

• Reversing signs, so a deficit is shown as a surplus.
• Leaving out units or the percentage sign on shares of GDP.
• Writing “unit labour cost rose” without comparing with competitors.
• Calculating elasticity effects on volume but forgetting the price change on imports.
• Assuming depreciation always improves the balance.
• Describing policies but not the step-by-step mechanism.
• Stopping at the home effects when the question asks about the global economy.
• Judging a deficit without referring to size, cause or financing.

Next steps

• Revision notes for condensed recall.
• Study guide for full explanations.
• AQA A-level Economics hub and checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics (7135 and 7136), for first teaching from September 2015, version 1.3, 29 June 2022, published by AQA.