AQA GCSE Economics: Balance of payments and distribution of income (8136)

The balance of payments records the money flowing into and out of a country from its trade and other transactions with the rest of the world; at GCSE the focus is the current account. The distribution of income describes how a country’s income is shared between households, and how far the government narrows the gap through taxes and spending. AQA GCSE Economics (8136) sections 3.2.2.5 and 3.2.2.6 expect you to calculate a current account balance, explain why deficits and surpluses arise, and explain how inequality occurs and how redistribution works.

Both sections are part of 3.2 How the economy works, assessed on Paper 2, with no tiers. Countries and figures are invented unless a real UK fact is stated. Pair this guide with the revision notes and the practice questions. The trade side links to the international trade revision notes, and taxes are covered in the government revenue and spending guide. Course links: AQA GCSE Economics hub, checklist and free diagnostics.

Syllabus coverage

Specification point	What you must be able to do
3.2.2.5 Balance of trade and balance of payments	Tell the balance of trade from the current account and do simple calculations with current account figures
3.2.2.5 Surpluses and deficits	Explain the meaning, significance and reasons for a current account deficit or surplus
3.2.2.5 Policies	Explain government policies to influence the balance of payments
3.2.2.6 Income and wealth inequality	Describe the distribution of income in the UK; tell income from wealth
3.2.2.6 Causes and consequences	Explain how inequality in the distribution of income can occur and what it leads to
3.2.2.6 Redistribution	Explain how taxation and government spending redistribute income and wealth, and the consequences

What is the balance of payments?

The current account of the balance of payments records:

• Trade in goods — exports and imports of physical products, such as cars or food.
• Trade in services — exports and imports of services, such as banking, insurance and tourism.
• Income flows — such as profits and interest earned abroad and paid abroad.

The balance of trade is exports minus imports of goods and services. The current account balance adds the income flows to the balance of trade.

Worked example: calculating the current account (illustrative)

Country A, in billion units:

Item	Value
Exports of goods	120
Imports of goods	150
Exports of services	70
Imports of services	45
Net income from abroad	−3

• Balance of trade in goods = 120 − 150 = −30
• Balance of trade in services = 70 − 45 = +25
• Balance of trade = −30 + 25 = −5
• Current account balance = −5 + (−3) = −8, a deficit of 8.

Always state whether the answer is a deficit (negative) or a surplus (positive).

Why does a current account deficit or surplus happen?

Reasons for a deficit	Reasons for a surplus
Domestic goods are less competitive on price or quality	Exports are competitive on price, quality or reputation
Strong consumer spending pulls in imports	Weak domestic spending keeps imports low
A strong exchange rate makes exports dearer abroad and imports cheaper	A weak exchange rate makes exports cheaper abroad
A small manufacturing base, so many goods are imported	Firms specialise in goods the world wants to buy

Does a deficit matter?

A small, short-lived deficit is not usually a problem. It may simply mean consumers are buying more imports while incomes are high. A large and persistent deficit matters more because:

• spending on imports supports jobs abroad rather than at home;
• the deficit has to be financed, for example by borrowing from abroad or selling assets to foreign buyers;
• it may show that domestic firms are not competitive.

A surplus brings income into the country and supports jobs in export industries, but it can mean consumers at home are spending relatively little.

How can the government influence the balance of payments?

• Supply-side policies such as training and investment make domestic firms more competitive, so exports rise over time.
• Reducing domestic spending through higher interest rates or taxes cuts spending on imports, but it also slows growth and raises unemployment.
• A fall in the exchange rate makes exports cheaper abroad and imports dearer, which can narrow a deficit.

These policies can conflict with other objectives, so evaluation should name the trade-off.

How is income distributed in the UK?

Income is a flow of money received over a period, such as wages, profits, interest and benefits. Wealth is the stock of assets a person owns, such as property, savings and shares. In the UK, as in most countries, income is unequally distributed, and wealth is distributed more unequally than income because assets build up over time and can be inherited.

Why does inequality occur?

• Differences in skills and qualifications — highly skilled workers earn more.
• Differences in wealth — people who own property or shares earn rent, interest and dividends.
• Unemployment — people without work rely on benefits.
• Inheritance — wealth passes from one generation to the next.
• Age and household type — retired people and single-earner households often have lower incomes.

What are the consequences of inequality?

Some inequality gives people an incentive to train, work hard and start businesses. Large inequality can mean poorer health and education for low-income households, lower social mobility and social tension. Low-income households may also spend less, which affects demand in the economy.

How does the government redistribute income and wealth?

• Progressive taxation — the percentage of income paid in tax rises as income rises, so higher earners pay a larger share.
• Welfare benefits — payments to people on low incomes, the unemployed and pensioners.
• Public services — free or subsidised education and healthcare benefit low-income households most relative to their income.
• Taxes on wealth — such as taxes on inheritance.

Worked example: a progressive tax (illustrative)

Country B taxes the first 12,000 of income at 0% and the rest at 20%. Worker X earns 20,000 and pays 0.2 × 8,000 = 1,600, which is 8% of income. Worker Y earns 80,000 and pays 0.2 × 68,000 = 13,600, which is 17% of income. The share of income taken in tax rises with income, so the tax is progressive and narrows the gap after tax.

Consequences of redistribution

Redistribution reduces poverty and inequality, but very high taxes may reduce the incentive to work or invest, and benefits must be paid for. Your judgement should weigh fairness against incentives.

Common errors

• Forgetting to say “deficit” or “surplus” after a current account calculation.
• Treating the balance of trade and the current account as the same thing.
• Confusing income (a flow) with wealth (a stock).
• Describing a progressive tax as one where rich people simply pay more money; it is about the percentage of income.

Frequently asked questions

Is a current account deficit always bad? No. A small deficit while incomes are rising may be harmless; a large deficit that lasts for years is more worrying because it must be financed.

What is the difference between the balance of trade and the current account? The balance of trade is exports minus imports of goods and services; the current account also includes income flows such as profits and interest.

Why is wealth more unequal than income? Wealth builds up over time and can be inherited, so differences grow across a lifetime and between generations.

How does a progressive tax reduce inequality? It takes a larger percentage of high incomes than low incomes, so after-tax incomes are closer together.

Official syllabus

AQA GCSE Economics (8136) specification, for first teaching from September 2017, published by AQA: sections 3.2.2.5 Balance of payments and 3.2.2.6 Distribution of income.