Cambridge O Level Economics: Current account of the balance of payments (2281) – 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 all four outcomes of section 6.4 of the Cambridge O Level Economics 2281 syllabus for examination in 2026. Every country and figure is invented for illustration. Calculators may be used. Read the study guide and revision notes first. Related: the Cambridge O Level Economics hub, the checklist and the free diagnostics.

Questions

1. State which part of the current account records each of these for Country D: (a) a foreign tourist pays for a hotel stay; (b) a firm pays interest to a foreign lender; (c) the government sends emergency aid to another country; (d) timber is sold abroad. [4]

2. Country D’s balances for one year, in millions of units, are: goods -73, services +41, primary income -19, secondary income +22.

(a) Find the current account balance and say if it is in surplus or in deficit. [2] (b) Country D’s GDP is 1,450 million units. Express the balance as a percentage of GDP. [2]

3. Country W, one year, millions of units. Goods: exports 880, imports 790. Services: exports 205, imports 260. Primary income: received 112, paid 140. Secondary income: received 64, sent 31. GDP is 1,600.

(a) Work out the balance for goods, services, primary income and secondary income. [4] (b) Find the current account balance and say whether it is in surplus or in deficit. [2] (c) Express the balance as a percentage of GDP. [1]

4. A country has a current account deficit of 12. Its goods balance is -35, services +20 and primary income -9. Calculate the secondary income balance. Show your working. [3]

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

6. Country H earns most of its export income from one crop. Its export volume stays the same, but the world price of the crop falls by 15%. Export earnings were 600 million units and imports are 700 million units.

(a) Calculate the new export earnings and the fall in earnings. [2] (b) Calculate the goods balance before and after the price fall. [2] (c) Explain why depending on one export makes the current account unstable. [2] (d) Explain how one supply-side policy could reduce this dependence. [2]

7. Country J’s currency, the rin, falls from 1 rin = 0.80 dru to 1 rin = 0.64 dru (the dru is a foreign currency). A machine exported by J costs 250 rin. A foreign good costs 160 dru.

(a) Calculate the machine’s price in dru before and after the fall. [2] (b) Demand for J’s exports has a PED of 1.8. Calculate the percentage change in quantity demanded. [2] (c) Demand for imports has a PED of 0.3. Calculate the foreign good’s price in rin before and after, and explain what happens to J’s spending on it. [3]

8. Country P has run a large current account deficit for several years.

(a) Explain how the deficit could affect GDP and employment. [3] (b) Explain how, under a floating exchange rate, the deficit could lead to higher inflation. [3]

9. Country L keeps its exchange rate fixed. It has a deficit of 24 million units a year and foreign reserves of 99 million units.

(a) Calculate how many years the reserves could cover the deficit, to 1 decimal place. [2] (b) Explain what the government might be forced to do as the reserves run low. [3]

10. Country N imports 2,000 bicycles a year at 150 units each. It adds a 20% tariff. PED for the bicycles is 0.5.

(a) Find the price each buyer now pays. [1] (b) Calculate the new quantity imported. [2] (c) Calculate the payment to foreign sellers before and after the tariff, and the saving. [2] (d) Explain one reason why the tariff may not remove a large deficit. [2]

11. A government considers cutting spending and raising taxes to reduce a current account deficit. Evaluate whether this is the best policy. [8]

Answers

1. (a) Services trade [1]. (b) Primary income, as an outflow [1]. (c) Secondary income [1]. (d) Goods trade [1]. [4] Examiner insight: Name the component, not just “income” or “trade”. Answers that say “income” alone leave the examiner unable to tell primary from secondary.

2. (a) -73 + 41 - 19 + 22 = -29 [1]. This is a deficit [1]. (b) 29 ÷ 1,450 × 100 [1] = 2.0% of GDP (a deficit) [1]. Examiner insight: Keep the minus sign and say “deficit”. A bare “29” leaves the direction unclear.

3. (a) Goods 880 - 790 = +90 [1]. Services 205 - 260 = -55 [1]. Primary income 112 - 140 = -28 [1]. Secondary income 64 - 31 = +33 [1]. (b) 90 - 55 - 28 + 33 = +40 [1], a surplus [1]. (c) 40 ÷ 1,600 × 100 = 2.5% [1]. Examiner insight: Lay out one balance per line, then add. Neat working lets you pick up credit even if one balance is wrong.

4. Known balances: -35 + 20 - 9 = -24 [1]. Secondary income = total minus known = -12 - (-24) [1] = +12 [1]. Examiner insight: Subtracting a negative number is where most slips happen. Check by adding all four balances back to -12.

5. Two causes, each with a reason and a developed link. For example: prices rise faster than rivals’ [1], so exports fall and imports rise [1]; incomes rise strongly [1], so households buy more imports [1]. Other creditworthy causes include profits paid to foreign owners (a primary income outflow) and a recession abroad that cuts demand for exports. [4] Examiner insight: A list of causes with no link to the account earns less than two causes explained step by step.

6. (a) 600 × 0.85 = 510 [1], a fall of 90 million [1]. (b) Before: 600 - 700 = -100 [1]. After: 510 - 700 = -190 [1]. (c) Export earnings depend on one crop’s world price [1], so a price fall cuts earnings sharply while import spending stays high [1]. (d) Example: training and investment in manufacturing [1] create other exports, so earnings are less tied to one price [1]. [8] Examiner insight: In part (c) say why the account is unstable, not only that one product is risky. Link the price to earnings and to the balance.

7. (a) Before: 250 × 0.80 = 200 dru [1]. After: 250 × 0.64 = 160 dru [1]. (b) Price change: 160 ÷ 200 = -20% [1]. Quantity change: 1.8 × 20 = +36% [1]. (c) Before: 160 ÷ 0.80 = 200 rin; after: 160 ÷ 0.64 = 250 rin, a 25% rise [1]. Quantity falls 0.3 × 25 = 7.5% [1]. Spending: 1.25 × 0.925 = 1.156, so spending rises about 15.6% because demand is inelastic [1]. [7] Examiner insight: State the direction of each price change before using PED. Applying PED to the wrong price is a common reason for losing credit here.

8. (a) Imports exceed exports, so net exports fall [1]. Net exports are part of total demand, so demand for home output and GDP are lower [1]. Firms cut output and jobs [1]. (b) More of the currency is supplied than demanded [1], so its value falls [1]. Imported goods and materials cost more, raising firms’ costs and prices [1]. [6] Examiner insight: Build each answer as a chain with “so” or “because”. Jumping from “deficit” straight to “inflation” leaves out the steps that earn credit.

9. (a) 99 ÷ 24 [1] = 4.1 years [1]. (b) To hold a fixed rate the central bank sells reserves [1]. When reserves are nearly gone it cannot support the rate [1]. It might raise interest rates, borrow abroad, or devalue the currency [1]. [5] Examiner insight: Give the unit “years” and round last of all. Name a concrete action in part (b), not “take action”.

10. (a) 150 × 1.20 = 180 units [1]. (b) Price rise 20%; quantity falls 0.5 × 20 = 10% [1]. 2,000 × 0.90 = 1,800 bicycles [1]. (c) Before: 2,000 × 150 = 300,000. After: 1,800 × 150 = 270,000 [1]. Saving 30,000 [1]. (d) Example: demand is inelastic, so quantity falls less than the price rises [1], so imports fall only modestly; or trading partners may retaliate [1], cutting exports. [7] Examiner insight: Pay foreign sellers 150 per bicycle, not 180. The tariff goes to the government, so do not count it as an import payment.

11. How it works: higher taxes and lower spending cut incomes [1], so spending on imports falls [1]. Strength: it can act fairly fast and also lowers inflation, which may help competitiveness [1]. Weakness: it lowers output and raises unemployment [1], conflicting with the aims of growth and full employment [1]. It may not address the cause: if the deficit comes from low quality or poor productivity, only supply-side policy fixes it [1]. Judgement: it is a short-run measure, effective for a small deficit caused by excess demand [1], but a poor choice alone if the deficit is structural, where supply-side policy is better despite being slow [1]. [8] Examiner insight: Evaluation gains credit when it reaches a judgement tied to a condition, such as the cause or size of the deficit. A balanced list with no conclusion usually stays at description.

Where marks are usually lost

• Dropping the sign on a deficit or forgetting to state “deficit” or “surplus”.
• Subtracting a negative balance incorrectly when finding a missing component.
• Confusing secondary income (gifts, aid, remittances) with trade in services.
• Applying PED to the wrong price or quantity.
• Counting a tariff as a payment to the foreign seller.
• Stopping a chain of reasoning after one step.
• Treating every deficit as harmful without discussing cause, size or time.
• Listing policies without judging how effective they are.

Next steps

• Re-read the revision notes and study guide.
• Try wider international trade practice.
• Visit the hub and the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

The source is the Cambridge O Level Economics 2281 syllabus for 2026 (version 2), published by Cambridge International. This set covers section 6.4.