Cambridge IGCSE Economics: Current account of the balance of payments (0455) – 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.

This set covers sections 6.4.1 to 6.4.4 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. The countries and numbers are fictional, and the mark totals are our own guide. Teaching is in the study guide and the revision notes. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. Money figures are in millions of units unless stated.

Questions

1. Define the current account of the balance of payments. [2]

2. State the section of the current account in which each transaction of Country D is recorded. (a) A university earns fees from overseas students. (b) A resident receives interest from a bank abroad. (c) The government gives disaster relief abroad. (d) A firm exports furniture. [4]

3. Country D (invented) has these transactions in one year. Goods: inflows 410, outflows 365. Services: inflows 95, outflows 140. Primary income: inflows 30, outflows 48. Secondary income: inflows 12, outflows 36. Its GDP is 1,050.

(a) Calculate the balance on each of the four sections. [4] (b) Calculate the current account balance. [1] (c) Express the balance as a percentage of GDP. [2]

4. Country E (invented) has a current account surplus of 60. Its goods balance is +90, services balance +35 and secondary income balance -20. Calculate the balance on primary income. [3]

5. Explain two causes of a current account deficit. [4]

6. Country A (invented) earns most of its export income from one mineral. Explain how a rise in the world price of the mineral could affect Country A’s current account and exchange rate. [5]

7. The currency of Country G (invented) falls from 0.50 to 0.40 units of foreign currency per unit of G’s currency. An export costs 300 units in G and a foreign good costs 80 foreign units. Before the fall, G exports 2,000 of the export and imports 3,000 of the foreign good. Export PED is 0.5 and import PED is 0.4.

(a) Calculate the foreign price of the export before and after the fall, and the percentage change. [2] (b) Calculate the new quantity of exports and the change in export earnings, in G’s currency. [3] (c) Calculate the percentage change in the home price of the import, the new quantity of imports and the change in import spending, in G’s currency. [3] (d) State the overall change in the balance on goods and explain the result. [2]

8. Country H has had a large current account deficit for several years. Explain two possible consequences for its economy. [4]

9. Explain one benefit and one problem of a persistent current account surplus. [4]

10. Country J (invented) imports goods worth 800. It imposes a tariff of 20%. Assume that foreign prices do not change and that quantity falls by the PED multiplied by the percentage price rise.

(a) Import PED is 0.5. Calculate the percentage fall in quantity, the new value of imports (at foreign prices) and the saving. [3] (b) Repeat the calculation with an import PED of 2.0. [2] (c) Explain why the tariff is more effective in (b). [2] (d) Explain one other reason why a tariff may fail to cure a deficit. [2]

11. Explain how a rise in income tax could reduce a current account deficit and give one cost of this policy. [4]

12. Country K has a persistent current account deficit that comes from high production costs and low-quality exports. Evaluate the view that supply-side policies are the best way for Country K to correct the deficit. [10]

Answers

1. It records a country’s trade in goods and services, primary income and secondary income [1] with the rest of the world over a period of time [1]. [2] Examiner insight: A definition earns most when it names the components or the flows with the rest of the world. Saying only that it is about trade leaves out the income sections.

2. (a) Trade in services [1]. (b) Primary income [1]. (c) Secondary income [1]. (d) Trade in goods [1]. [4] Examiner insight: Classification questions are won by knowing that interest is primary income and aid is a transfer. Put each section next to its letter so that the match is clear.

3. (a) Goods: 410 - 365 = +45 [1]. Services: 95 - 140 = -45 [1]. Primary income: 30 - 48 = -18 [1]. Secondary income: 12 - 36 = -24 [1]. (b) 45 - 45 - 18 - 24 = -42, a deficit [1]. (c) 42 / 1,050 [1] x 100 = 4.0% of GDP (a deficit) [1]. [7] Examiner insight: Show each subtraction and keep the signs. A correct total with no sign, or a total described as a surplus, is easy to mark down.

4. Current account = goods + services + primary + secondary [1]. 60 = 90 + 35 + primary - 20, so primary = 60 - 90 - 35 + 20 [1] = -45 (a deficit) [1]. [3] Examiner insight: Write the identity first. Rearranging a sum with mixed signs is where slips occur, so check by adding 90 + 35 - 45 - 20 = 60.

5. Any two developed causes, for example: High spending on imports [1] because rising incomes lead households to buy more foreign goods [1]. Uncompetitive exports [1] because high costs or low productivity make them dear compared with rivals, so fewer are sold [1]. Other acceptable causes: recession among trading partners, a fall in the price of a main export, high inflation at home, heavy interest payments to foreign lenders. [4] Examiner insight: Each cause needs a link to the account. Answers that list four causes with no development tend to gain less than two causes with a reason each.

6. The price rise increases export earnings [1] because the main export now sells at a higher price [1]. The goods balance moves towards surplus, or the deficit narrows [1]. Foreign buyers need more of A’s currency to pay [1], so demand for the currency rises and the exchange rate tends to rise [1]. [5] Examiner insight: This is a chain question. Answers gain credit by moving step by step from the price to earnings, to the balance and to the currency, and not by jumping to the final result.

7. (a) Before: 300 x 0.50 = 150 foreign units [1]. After: 300 x 0.40 = 120, a fall of 20% [1]. (b) Quantity rises by 0.5 x 20% = 10%, to 2,200 [1]. Earnings: 300 x 2,000 = 600,000 before and 300 x 2,200 = 660,000 after [1], a rise of 60,000 [1]. (c) Home price: 80 / 0.50 = 160 before and 80 / 0.40 = 200 after, a rise of 25% [1]. Quantity falls by 0.4 x 25% = 10%, to 2,700 [1]. Spending: 160 x 3,000 = 480,000 before and 200 x 2,700 = 540,000 after, a rise of 60,000 [1]. (d) Export earnings rise by 60,000 and import spending rises by 60,000, so the balance on goods is unchanged [1]. Demand for both is inelastic, so quantities change by less than prices and the depreciation does not improve the balance [1]. [10] Examiner insight: Work in one currency throughout. Mixing foreign units with G’s currency is the usual error, so state the unit at each step.

8. Any two, each explained. Lower GDP and employment [1]: net exports are negative, which reduces total demand, so firms that export or compete with imports may cut output and jobs [1]. Pressure on the exchange rate [1]: fewer foreign currency inflows mean lower demand for the currency, so it may fall and raise import prices and inflation [1]. Also acceptable: borrowing or selling assets to finance the deficit, with larger interest payments later. [4] Examiner insight: A consequence is developed by saying what changes next. Naming “unemployment” or “inflation” alone is a start, not an explanation.

9. Benefit: a surplus adds to total demand [1], which can raise output and jobs in export industries [1]. Problem: it may mean residents consume too little relative to what they produce [1], or it may cause disputes with partners that run deficits and may respond with protection [1]. [4] Examiner insight: A question asking for both a benefit and a problem needs both. A one-sided answer cannot reach full credit, however well it is developed.

10. (a) Quantity falls by 0.5 x 20% = 10% [1]. New value 800 x 0.90 = 720 [1], so a saving of 80 [1]. (b) Quantity falls by 2.0 x 20% = 40% [1]. New value 800 x 0.60 = 480, a saving of 320 [1]. (c) When demand is elastic, buyers respond strongly to the higher price [1], so imports fall by a larger proportion than the price rises, giving a bigger cut in volume and spending abroad [1]. (d) Any one: trading partners may retaliate with their own tariffs and cut exports [1], so the net gain is smaller [1]. Equally acceptable: dearer imported inputs raise firms’ costs, which makes exports less competitive and reduces the effect. [9] Examiner insight: Say that the stated assumption is being used. Linking the size of the saving to elasticity is the point of the question, and the explanation in part (c) needs to refer back to the figures.

11. Higher income tax leaves households with less disposable income [1], so they cut spending, including spending on imports [1], reducing the import bill and the deficit [1]. A cost: lower spending on domestic goods too, so output falls and unemployment may rise [1]. [4] Examiner insight: The cost is part of the question. Answers that stop after describing the benefit leave marks available.

12. Points that can earn credit, each developed:

• Supply-side policy such as training, infrastructure or research cuts costs and raises quality [1]. This tackles the cause of the deficit directly [1].
• Exports become more competitive, so sales abroad rise and domestic goods replace imports [1].
• The effect lasts, and it does not cut growth the way contractionary policy does [1].
• But it is slow and costly, since training and infrastructure take years to pay off [1], so a deficit may continue meanwhile [1].
• Alternatives work faster: a lower exchange rate or tariffs [1]. Yet these depend on PED, risk retaliation, and may raise inflation [1].
• Judgement: for a deficit caused by costs and quality, supply-side policy is the most suitable in the long run, possibly alongside a short-term measure; the verdict is better if it depends on the time frame and the size of the deficit [2]. [10] Examiner insight: Evaluation questions reward a clear judgement that is supported by comparison. Repeating that supply-side policy is good, with no comparison with other policies, gives little scope for evaluation.

Where marks are usually lost

• Dropping the minus sign or the words deficit and surplus.
• Giving the goods balance when asked for the current account balance.
• Putting transfers such as aid or remittances into primary income.
• Mixing foreign currency with home currency in exchange rate calculations.
• Stating that a depreciation always improves the balance, with no mention of PED.
• Listing causes or policies with no link to the account or the cause.
• Giving consequences without a chain of reasoning.
• Stopping at one side of an argument when asked to evaluate.

Next steps

• Revise with the revision notes and re-read the study guide.
• Tick off the topic on the printable checklist and see the Cambridge IGCSE Economics hub.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment (Cambridge International Education), section 6.4.