Cambridge A Level Economics: Balance of payments accounts and correcting policies (9708) – 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 cover section 11.1 (outcomes 11.1.1 to 11.1.3) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topics 7 to 11 are A Level content. All countries and figures are invented, in billions of currency units (bn mu) unless stated. A financial account inflow, including a fall in reserves, counts as positive. Read the study guide and the revision notes first. Course pages: hub and checklist.

Questions

1. For each transaction in Country M, name the account and, if it is in the financial account, the category. State whether it is a credit or a debit. (i) A foreign firm buys a 70% stake in a Country M company. (ii) A foreign government cancels part of Country M’s debt. (iii) Country M’s central bank sells foreign currency reserves. (iv) A Country M pension fund buys bonds issued abroad. [4]

2. Country M, one illustrative year. Goods: credits 120, debits 134. Services: 70 and 52. Primary income: 18 and 25. Secondary income: 9 and 12. Capital account: credits 5, debits 1. Financial account: direct investment +6, portfolio investment −3, other investment +2, reserves unchanged. GDP is 400.

(a) Find the combined trade balance for goods and services. [1] (b) Calculate the current account balance. [2] (c) Show the current account balance as a share of GDP, in percent. [1] (d) Calculate net errors and omissions. [2]

3. Explain how a current account deficit is paid for. [4]

4. In Country M the marginal propensity to save is 0.12, to be taxed 0.18 and to import 0.20. The government cuts spending by 5 to reduce the deficit.

(a) Calculate the multiplier. [2] (b) Find the fall in national income and the fall in imports. [2] (c) Explain one cost of using this policy. [2]

5. Explain why a rise in the interest rate may leave the current account worse. [4]

6. In Country M wages rise 3% and output per worker rises 5%.

(a) Calculate the change in unit labour cost. [2] (b) Export price elasticity of demand is 1.5 and the cost fall is passed on fully. Calculate the change in export volume. [1] (c) Explain why supply-side policy improves the current account slowly. [2]

7. Country M imports 2,000 units of a good at 35 mu each. It imposes a 20% tariff. Price elasticity of demand is −1.25.

(a) Calculate the new price and quantity. [2] (b) Find how much the payments made to foreign suppliers change. [2] (c) Calculate the tariff revenue. [1] (d) State one risk of using the tariff. [1]

8. Distinguish between expenditure-reducing and expenditure-switching policies, with one example of each. [4]

9. The currency of Country M falls 8%. Goods exports are 150 and imports are 180. Export prices in mu are unchanged and import prices in mu rise 8%. Export price elasticity of demand is 0.9 and import price elasticity of demand is 0.7.

(a) Calculate the new value of exports. [2] (b) Calculate the new value of imports. [2] (c) Calculate the new goods balance and its change from the original. [2]

10. Country N has a current account deficit caused mainly by rising costs and poor quality in its manufactured exports. The government is choosing between a devaluation and spending cuts. Evaluate the two policies. [10]

11. Country P’s current account deficit is financed mainly by short-term portfolio inflows. Evaluate whether the government should treat this as a serious problem. [8]

Answers

1. (i) Financial account, direct investment, credit [1]. (ii) Capital account, credit [1]. (iii) Financial account, reserve assets, credit [1]. (iv) Financial account, portfolio investment, debit [1]. [4] Examiner insight: Give the account, the category and the direction each time. A fall in reserves is a source of funds, which is why it is a credit here.

2. (a) Goods −14 and services +18, so +4 [1]. [1] (b) Primary −7 and secondary −3 [1]. Current account = −14 + 18 − 7 − 3 = −6 [1]. [2] (c) 6 ÷ 400 × 100 = −1.5% of GDP [1]. [1] (d) Capital account +4 and financial account 6 − 3 + 2 = +5 [1]. Errors = −(−6 + 4 + 5) = −3 [1]. [2] Examiner insight: Write out every line, with its sign, before you add. The identity (all accounts sum to zero) is a quick check on your balancing item.

3. The accounts sum to zero [1], so a current account deficit is matched by net inflows on the capital and financial accounts [1]. Inflows include foreign direct investment, portfolio investment and borrowing from abroad [1], or the central bank may draw down reserves [1]. [4] Examiner insight: Name the financing routes. An answer that only says “borrowing” misses most of the financial account.

4. (a) Withdrawals = 0.12 + 0.18 + 0.20 = 0.50 [1]. Multiplier = 1 ÷ 0.5 = 2 [1]. [2] (b) Income falls 5 × 2 = 10 [1]. Imports fall 0.2 × 10 = 2.0 [1]. [2] (c) Output falls by 10 to save 2 of imports, so growth and jobs suffer [1]. If the deficit comes from weak competitiveness, the cause is untouched and imports rise again in recovery [1]. [2] Examiner insight: Link the cost to numbers from your own working. Referring to the 10 against the 2 shows the cost rather than asserting it.

5. A higher rate attracts hot money [1], raising demand for the currency and its exchange rate [1]. Exports become dearer abroad and imports cheaper [1], so if demand is elastic export volume falls and import volume rises, which can outweigh the fall in import spending from lower income [1]. [4] Examiner insight: Take the chain to the current account. Stopping at “the currency rises” misses the final link.

6. (a) 1.03 ÷ 1.05 = 0.981 [1]. Unit labour cost falls 1.9% [1]. [2] (b) 1.5 × 1.9 = about 2.9% rise in export volume [1]. [1] (c) Training, infrastructure and research take years to build [1], and it is uncertain how far they raise productivity, so costs and quality change gradually [1]. [2] Examiner insight: Use the rounded or unrounded figure consistently and say “about” for a rounded elasticity result.

7. (a) Price = 35 × 1.2 = 42 mu [1]. Quantity falls 1.25 × 20 = 25%, to 1,500 [1]. [2] (b) Before: 2,000 × 35 = 70,000. After: 1,500 × 35 = 52,500 [1]. Payments fall by 17,500 mu [1]. [2] (c) 1,500 × 7 = 10,500 mu [1]. [1] (d) Trading partners may retaliate with their own tariffs, cutting exports (or buyers face higher prices) [1]. [1] Examiner insight: Use the pre-tariff price for payments to foreign suppliers. Using 42 would count the tariff as money sent abroad.

8. Expenditure-reducing policies cut total spending in the economy, including spending on imports [1]. Example: contractionary fiscal policy or a higher interest rate [1]. Expenditure-switching policies change relative prices so that spending moves from imports to home goods [1]. Example: devaluation or a tariff [1]. [4] Examiner insight: A definition and an example are separate points. A tariff is switching because it redirects spending, not reduces it.

9. (a) Export volume rises 0.9 × 8 = 7.2% [1]. Exports = 150 × 1.072 = 160.8 [1]. [2] (b) Import volume falls 0.7 × 8 = 5.6% [1]. Imports = 180 × 1.08 × 0.944 = 183.5 [1]. [2] (c) Balance = 160.8 − 183.5 = −22.7 [1]. Original −30, so the deficit narrows by 7.3 [1]. [2] Examiner insight: Apply the price rise and the volume change to imports together. Using only the volume change understates the value.

10. A devaluation makes exports cheaper to foreign buyers and imports dearer to home buyers [1], switching spending to home goods [1]. It works if the sum of the elasticities is high enough [1]. But the deficit comes from costs and quality, and weak quality makes demand less responsive to price [1]. Dearer imports can add to inflation, and the J curve delays any gain [1]. Spending cuts reduce income and so imports through the mpm [1], at a cost in output and jobs [1], and they do not improve competitiveness, so the cause remains [1]. Supply-side policy on quality and productivity is needed with either [1]. Judgement: devaluation fits the cause better, if there is spare capacity and the elasticities are high enough, while cuts suit only a deficit from excess demand [1]. [10] Examiner insight: Match each policy to the stated cause and finish with a judgement that names a condition. A comparison of two lists without a verdict leaves the question unanswered.

11. The deficit is matched by net financial inflows, so the accounts balance [1]. Portfolio inflows are mobile and can reverse quickly [1]. A reversal can cause a sharp fall in the currency, a drain on reserves or a forced rise in interest rates [1]. A fall in the currency raises import prices and makes foreign debt dearer to repay [1]. On the other hand, a small deficit, or inflows that fund productive investment, may be sustainable [1]. Ample reserves or a flexible exchange rate can absorb shocks [1]. The seriousness depends on the size, the cause and how long it lasts [1]. Judgement: a concern if it is large and rests on volatile funds, with the condition stated [1]. [8] Examiner insight: Separate the type of funding from the size of the deficit. A judgement that names the condition on which it rests is stronger than a flat yes or no.

Where marks are usually lost

• Giving a financial account item the wrong direction, especially a fall in reserves.
• Dropping the minus sign on a deficit or on net errors and omissions.
• Calling the current account “the balance of payments” when the whole account sums to zero.
• Counting tariff revenue as payment to foreign suppliers.
• Naming a policy without linking it to the cause of the deficit.
• Calling a tariff expenditure-reducing.
• Saying a devaluation always improves the current account with no mention of elasticities or the J curve.
• Stopping an evaluation at a list of points with no judgement.

Next steps

• Review with the revision notes and the study guide.
• Use the course hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, section 11.1 (Cambridge University Press & Assessment).