Cambridge A Level Economics: Current account and policies to correct imbalances (9708) – Revision Notes

These notes condense sections 6.3 (Current account of the balance of payments) and 6.5 (Policies to correct imbalances in the current account) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 6 is AS Level content, assumed knowledge for A Level Papers 3 and 4. For full explanations and longer worked examples, read the study guide. Then test yourself with the practice questions. All figures are invented for illustration, in billions of currency units (bn cu) unless stated.

Related pages: course hub, printable checklist, the international economic issues practice set and the free 10-minute diagnostics.

Definitions (6.3.1)

Term	Meaning
Current account	Record of a country’s trade in goods, trade in services, primary income and secondary income with the rest of the world over a period
Trade in goods	Exports and imports of physical products
Trade in services	Exports and imports of intangible products, such as tourism, transport, finance
Primary income	Income from employment and from investment abroad: wages, interest, profit, dividends
Secondary income	Transfers with nothing given in return: remittances, aid, contributions to international bodies
Credit / debit	Money flowing in / out
Balance	Credits minus debits for a section or the whole account
Surplus / deficit	Positive balance / negative balance

An imbalance is a persistent deficit or surplus. Stability is the objective, not a balance of exactly zero.

Formulas (6.3.2)

Measure	Calculation
Balance of trade in goods	Goods exports − goods imports
Balance of trade in services	Services exports − services imports
Balance of trade in goods and services	Goods balance + services balance
Current account balance (CAB)	Goods and services balance + primary income balance + secondary income balance
CAB as a share of GDP	CAB ÷ GDP × 100

Method in steps

1. Find credits minus debits for each of the four lines, keeping the sign.
2. Add goods and services first.
3. Add primary and secondary income.
4. Check: the four section balances must add to the same total.
5. Label the answer deficit or surplus and give the unit.

Reminder example

Country Q, bn cu. Goods 64 credits and 71 debits. Services 30 and 22. Primary income 9 and 14. Secondary income 5 and 3.

Goods: 64 − 71 = −7. Services: 30 − 22 = +8. Goods and services: +1. Primary: −5. Secondary: +2. CAB = 1 − 5 + 2 = −2, a deficit.

Causes (6.3.3)

Direction	Cause	Why it matters
Deficit	Domestic income growth faster than partners	Higher import spending, especially if YED of imports is high
Deficit	Higher unit costs or inflation than rivals	Exports lose price competitiveness
Deficit	Low quality or poor design	Weak non-price competitiveness
Deficit	Recession among main trading partners	Less demand for exports
Deficit	Fall in the price of a main export	Lower export earnings
Deficit	Overvalued currency	Exports dearer abroad, imports cheaper
Deficit	Heavy foreign debt or foreign-owned firms	Income outflows on the primary account
Surplus	The opposites of the above	High saving, strong competitiveness, slow import growth

Imports change by the YED of imports times the percentage change in income. Example: YED of imports 2.0 and income up 2.5% means imports rise 5%. From 80 that gives 84.

Consequences (6.3.4)

Area	Deficit	Surplus
Aggregate demand	Net exports fall, so AD is lower than otherwise	Net exports rise, so AD is higher
Growth and jobs	Possible loss of output and jobs in traded sectors	Possible gain, but inflation risk near full capacity
Exchange rate	Pressure downwards, so import prices rise	Pressure upwards, so exports become dearer
Financing	Needs net inflows elsewhere: borrowing, asset sales, use of reserves	Allows lending abroad or building reserves
External economy	Partners gain export demand; foreign ownership grows	Partners face matching deficits and may use protection

Judgement points: size, duration, cause, and whether the deficit funds investment or consumption.

Policy objective (6.5.1)

Stability avoids a large, lasting deficit that needs risky finance and a falling currency, and avoids a large surplus that signals weak domestic demand and invites retaliation. It supports growth, employment and price stability. It can conflict with them.

Policies (6.5.2)

Policy	How it works	Strength	Weakness
Fiscal (cut spending, raise taxes)	Lower AD, lower income, lower imports by mpm × fall in income	Quick to apply	Costs output and jobs; weak if mpm is low
Monetary (raise interest rate)	Lower consumption and investment; slower inflation; may attract capital	Flexible and fast to adjust	May raise the exchange rate; hits investment
Supply-side (education, infrastructure, research)	Higher productivity, lower unit costs, better quality; LRAS shifts right	Lasting; does not cut output	Slow, costly, uncertain
Protectionist (tariff, quota, subsidy)	Raise price of imports or limit quantity; help home producers	Direct effect on imports	Retaliation, higher prices, rule limits; depends on PED

Reminder: fiscal contraction

Marginal propensity to save 0.1, to be taxed 0.2, to import 0.2. Withdrawals = 0.5, multiplier = 2. Government spending falls by 6. Income falls 6 × 2 = 12. Imports fall 0.2 × 12 = 2.4.

Reminder: supply-side

Wages up 2%, productivity up 5%. Unit labour cost = 1.02 ÷ 1.05 = 0.971, a fall of 2.9%.

Reminder: tariff

Import price 50 cu, 300 units: payment to foreign suppliers 15,000. A 10% tariff lifts the buyer’s price to 55. With PED of −2, quantity falls 20% to 240. Payment to foreign suppliers = 240 × 50 = 12,000, a fall of 3,000.

Choosing and judging a policy

1. Identify the cause of the imbalance.
2. Pick the policy that targets it.
3. State the chain: policy, then AD or costs or import prices, then imports or exports, then the account.
4. Weigh time lag, elasticities, side effects, retaliation, rules.
5. Give a judgement tied to a condition.

Must-know distinctions

• Balance of trade in goods and services is not the CAB. The CAB adds the two income lines.
• Primary income is a payment for supplying labour or capital. Secondary income is a transfer with nothing in return.
• Deficit is a flow in one period. Debt is a stock.
• A tariff payment goes to the home government. It is not a payment to the foreign supplier.

Quick self-test

1. Define the current account.
2. Classify interest paid to overseas bondholders.
3. Classify money sent by migrants to families at home.
4. Goods: credits 210, debits 185. Services: credits 40, debits 52. Calculate the balance of trade in goods and services.
5. Using question 4 and a primary income balance of −6 and secondary income balance of −4, calculate the CAB.
6. A CAB of −18 bn cu with GDP of 900 bn cu: calculate the deficit as a percentage of GDP.
7. Imports are 80 bn cu. Income rises 2.5% and YED of imports is 2.0. Calculate new imports.
8. mps 0.1, mpt 0.2, mpm 0.2. Government spending falls by 6. Calculate the fall in imports.
9. Wages rise 2% and productivity 5%. Calculate the percentage change in unit labour cost.
10. Give two reasons a persistent surplus may not be good for the surplus country.
11. Give two reasons a tariff may fail to improve the current account.

Answers

1. The record of trade in goods and services, primary income and secondary income between a country and the rest of the world.
2. Primary income, a debit.
3. Secondary income, a credit.
4. Goods +25, services −12, so +13 bn cu.
5. 13 − 6 − 4 = +3 bn cu, a surplus.
6. 18 ÷ 900 × 100 = 2.0% deficit.
7. Imports rise 2.0 × 2.5 = 5%, so 80 × 1.05 = 84 bn cu.
8. Withdrawals 0.5, multiplier 2; income falls 12; imports fall 0.2 × 12 = 2.4 bn cu.
9. 1.02 ÷ 1.05 = 0.971, so a fall of 2.9%.
10. Any two: weak domestic demand and low living standards; partners in deficit may retaliate; inflation pressure near full capacity; a stronger currency; resources tied up in foreign assets.
11. Any two: partners retaliate; demand is inelastic, so quantity barely falls; dearer imported inputs raise costs; the deficit has another cause; trade rules limit the policy.

Where marks are usually lost

• Writing a deficit without a minus sign, or giving the CAB without its unit.
• Stopping at goods and services and forgetting primary and secondary income.
• Using the wrong base in a percentage of GDP.
• Naming a policy without the chain from policy to the account.
• Forgetting that the effect of fiscal contraction depends on the mpm.
• Treating protection as a free fix, with no retaliation or consumer cost.
• Giving a conclusion that repeats the points and states no judgement.
• Mixing up primary and secondary income.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, sections 6.3 and 6.5 (Cambridge University Press & Assessment).