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

These notes condense section 6.4 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026 (6.4.1 to 6.4.4). For full explanations and longer worked examples, read the study guide. Test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. All data on this page is invented.

6.4.1 Components and calculations

Section	Meaning	Typical items
Trade in goods	Buying and selling of physical products	Exports and imports of grain, machines, cars
Trade in services	Buying and selling of intangible products	Tourism, banking, insurance, transport, consultancy
Primary income	Income from assets and work abroad	Profits, dividends and interest; wages of cross-border workers
Secondary income	Transfers with no good or service in return	Remittances, aid, gifts, payments to international bodies

Definition: the current account of the balance of payments records a country’s trade in goods and services, primary income and secondary income with the rest of the world over a period.

Formulas

Quantity	Formula
Balance on a section	inflows - outflows
Balance on goods and services	goods balance + services balance
Current account balance	goods + services + primary income + secondary income
Deficit or surplus as % of GDP	balance / GDP x 100

A negative balance is a deficit. A positive balance is a surplus. Show the minus sign.

Method in steps

1. Write the inflows and outflows for each section in a table.
2. Subtract outflows from inflows for each section.
3. Add the four balances, keeping signs.
4. State the answer as a deficit or surplus, with units.
5. If asked for a percentage of GDP, divide by GDP and multiply by 100.

Worked reminder

Country C (illustrative, millions of units): goods inflows 300 and outflows 340; services 110 and 60; primary income 25 and 45; secondary income 30 and 10.

Goods: 300 - 340 = -40. Services: 110 - 60 = +50. Primary income: 25 - 45 = -20. Secondary income: 30 - 10 = +20. Current account = -40 + 50 - 20 + 20 = +10, a surplus. The balance on goods and services is +10 as well. GDP is 800, so the surplus is 10 / 800 x 100 = 1.25% of GDP.

Reminder: Country C has a goods deficit but an overall surplus. Always report the section figures and the total.

6.4.2 Causes of deficit and surplus

Cause of deficit	Cause of surplus
High spending on imports (fast income growth, taste for foreign goods)	Strong, competitive exports
Uncompetitive exports (high costs, low productivity, low quality)	Low costs, high productivity, good quality
Home inflation above that of trading partners	Low inflation relative to partners
Overvalued or rising currency	Currency that keeps export prices low
Recession or slow growth among trading partners	Fast growth among trading partners
Fall in price of a main export	Rise in price of a main export
Heavy interest and profit payments abroad	Large income from investments abroad
Aid or remittances sent out	Aid or remittances received
Collapse in tourism inflows	Strong tourism inflows

Link the cause to the section it affects. For example, high debt interest appears under primary income, and a tourism fall appears under services.

6.4.3 Consequences

Net exports = exports - imports, and they are part of aggregate demand.

Variable	Deficit	Surplus
GDP	Lower net exports reduce demand and growth	Higher net exports raise demand and growth
Employment	Job losses in exporting and import-competing firms	More jobs in export industries
Inflation	Import prices rise if the currency falls; weak demand eases price pressure	Demand-pull pressure if the economy is near full capacity; a rising currency lowers import prices
Exchange rate	Pressure on the currency to fall	Pressure on the currency to rise

Further points:

• A deficit must be financed, by borrowing, selling assets or using foreign currency savings. Borrowing leads to more interest payments later.
• A small deficit used for investment may be sensible. A large one used for consumer goods is harder to defend.
• A surplus can reflect low living standards if people consume too little, and it can cause trade disputes with partners.

Chain example: income falls abroad, so demand for exports falls, so export earnings fall, so the goods balance worsens, so less foreign currency is earned, so demand for the home currency falls, so the exchange rate falls.

Exchange rate and PED reminder

A depreciation lowers the foreign price of exports and raises the home price of imports. Whether the balance improves depends on PED.

Case	Likely effect on the balance
Export and import demand both elastic	Improves
Export demand elastic, import demand inelastic	Likely improves (export gain larger)
Both inelastic	May worsen (little change in quantities, higher import bill)

Worked reminder: a foreign good costs 40 foreign units. The home currency falls from 0.50 to 0.40 foreign units. Home price rises from 40 / 0.50 = 80 to 40 / 0.40 = 100, a 25% rise. With import PED 0.4, quantity falls by 0.4 x 25% = 10%.

6.4.4 Policies and effectiveness

Policy	How it works	Main limitation
Supply-side (education, infrastructure, research)	Raises productivity and cuts costs, so exports are more competitive	Slow and costly; results uncertain
Contractionary fiscal or monetary policy	Lowers incomes, so lowers import spending	Lower growth, more unemployment
Tariffs and quotas	Make imports dearer or limit them	Retaliation; dearer inputs; weak if demand is inelastic
Subsidies to exporters or import substitutes	Lower prices of domestic goods	Cost to the government; may be challenged by partners
Embargo	Bans trade with a country	Extreme, harms consumers and firms
Lower exchange rate (devaluation or allowed fall)	Cheaper exports, dearer imports	Depends on PED; raises import prices and inflation
Export promotion and trade agreements	Opens new markets	Takes time; depends on partners

Worked reminder (tariff): imports of 500, tariff 10%. Import PED 0.8, so quantity falls by 8%, to 500 x 0.92 = 460, saving 40. If PED were 2.0, quantity falls by 20% to 400, saving 100.

Linking policy to cause

If the deficit comes from	A fitting policy	Why it fits
Weak competitiveness	Supply-side measures	Tackles costs and quality directly
Booming spending on imports	Contractionary policy	Cuts the demand that draws imports in
Overvalued currency	Lower exchange rate	Corrects relative prices
Dependence on one export	Diversification and export promotion	Spreads the risk of a price fall

Worked reminder (contractionary policy): a tax rise cuts household income by 200. If households spend 0.25 of each unit of income on imports, imports fall by 200 x 0.25 = 50. The cost is lower demand for domestic goods as well, so output and jobs may fall.

Evaluation checklist: match the policy to the cause; consider PED, time lag, retaliation, side effects (inflation, unemployment, growth) and who gains or loses.

Must-know distinctions

• Primary income is earned from assets or labour. Secondary income is a transfer.
• A trade deficit in goods is not the same as a current account deficit.
• A deficit means outflows exceed inflows. A surplus means inflows exceed outflows.
• Expenditure-reducing policy lowers demand. Expenditure-switching policy moves demand from imports to home goods.

Quick self-test

1. State the four sections of the current account.
2. In which section is each item recorded: (a) a foreign tourist’s hotel bill, (b) wages earned by a resident working for a foreign firm abroad, (c) profits paid to a foreign owner, (d) aid given?
3. Country D has goods inflows 410 and outflows 365. Calculate the goods balance.
4. Country E has balances of goods +90, services +35, primary income -45 and secondary income -20. Calculate the current account balance.
5. Country A has a current account deficit of 36 and GDP of 900. Express the deficit as a percentage of GDP.
6. Give two causes of a current account deficit.
7. Explain one effect of a deficit on the exchange rate.
8. Imports are 300 and a tariff of 20% is imposed. Import PED is 0.5. Calculate the new quantity of imports (as a value at unchanged prices).
9. Explain why a fall in the exchange rate may not improve the current account.
10. Give one drawback of raising interest rates to cut a deficit.

Answers

1. Trade in goods, trade in services, primary income, secondary income.
2. (a) Services; (b) primary income; (c) primary income; (d) secondary income.
3. 410 - 365 = +45.
4. 90 + 35 - 45 - 20 = +60, a surplus.
5. 36 / 900 x 100 = 4.0%.
6. Any two of: uncompetitive exports, high import demand, recession abroad, fall in price of main export, high interest payments abroad.
7. Fewer foreign currency inflows mean lower demand for the home currency, so the exchange rate tends to fall.
8. Price rise 20%, quantity falls 0.5 x 20% = 10%: 300 x 0.90 = 270.
9. If demand for exports and imports is inelastic, the volumes barely change and the import bill rises.
10. It reduces growth, investment and jobs, and raises the cost of borrowing.

Where marks are usually lost

• Leaving out the minus sign or the words deficit or surplus.
• Giving the goods balance when the question asks for the current account balance.
• Placing remittances or aid in primary income instead of secondary income.
• Describing a policy without saying how it changes the balance.
• Listing causes without linking them to the section they affect.
• Claiming a depreciation always works, without mentioning PED.
• Giving one-sided answers when the question says assess or evaluate.
• Forgetting units, or percentages of GDP when asked.

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.