Edexcel IAL Economics: Balance of payments and competitiveness (YEC11) – 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 statements 1 and 3 of 4.3.3 Balance of payments, exchange rates and international competitiveness in the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (Issue 2, June 2018). The specification lists Unit 4 as IA2 content, so it is for the full International Advanced Level only, not IAS. All countries, firms and figures are invented and illustrative. Support: study guide, revision notes, course hub, checklist and diagnostics.

Questions

1. Identify two items recorded in the current account of the balance of payments. [2]

2. Country P’s transactions (billion currency units, cu) are: goods exports 82, goods imports 95, services exports 30, services imports 21, net primary income -8, net secondary income +4, capital account +1, net errors and omissions -1.

(a) Calculate the current account balance. [3] (b) Calculate the financial account balance, counting inflows as positive. [2]

3. Country Q’s clothing industry pays total labour costs of 45,000 cu for 2,500 units in year 1, and 47,700 cu for 2,600 units in year 2.

(a) Calculate unit labour cost in each year and its percentage change to one decimal place. [3] (b) Rivals’ unit labour costs in a common currency are unchanged. Explain the effect on Country Q’s competitiveness. [2]

4. Output per worker is 60 in Country R and 48 in a rival.

(a) Calculate R’s relative productivity. [2] (b) R’s export price index rises 3% and the rival’s rises 10%, in the same currency. Calculate and interpret R’s relative export price index (base 100). [3]

5. Explain two reasons why a country might run a persistent current account deficit. [6]

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

7. Country S imports 80 billion cu and exports 72 billion cu. Real income rises 6% and the income elasticity of demand for imports is 1.5. Exports do not change.

(a) Calculate the new value of imports. [3] (b) Calculate the new trade balance. [2]

8. Explain how (a) improved infrastructure and (b) higher-quality human capital can raise international competitiveness. [6]

9. Country T has net external liabilities of 120 billion cu. It runs a deficit of 20 billion cu a year for 4 years, financed by borrowing, at a 5% interest rate on liabilities.

(a) Calculate its liabilities after 4 years. [2] (b) Calculate the rise in annual interest due. [2] (c) Explain two reasons why persistent imbalances of this kind matter for the world economy. [4]

10. Explain two problems for an economy of being internationally uncompetitive. [4]

11. Evaluate the view that education and training is the most effective way for a country to improve its international competitiveness. [10]

Answers

1. Trade in goods [1] and any one of trade in services, primary income or secondary income [1]. [2] Examiner insight: Name items that actually sit in the account; “trade” or “money” alone is too vague, and capital-account or financial-account items do not answer the question.

2. (a) Goods: 82 - 95 = -13 [1]. Services: 30 - 21 = +9 [1]. Current account = -13 + 9 - 8 + 4 = -8 [1]. (b) The accounts sum to zero, so the financial account = -(-8 + 1 - 1) [1] = +8 [1]. [5] Examiner insight: Show the sum; a wrong sign on the financial account is a common slip, so state your convention (inflows positive) next to the answer.

3. (a) Year 1: 45,000 ÷ 2,500 = 18 [1]. Year 2: 47,700 ÷ 2,600 = 18.35 [1]. Change = +1.9% [1]. (b) Unit labour cost rose while rivals’ did not, so Q is less competitive [1]. Q must raise export prices or accept lower profit, so sales abroad may fall [1]. [5] Examiner insight: Part (b) needs the link from cost to price to sales, not just “less competitive”; say the comparison is relative to rivals.

4. (a) 60 ÷ 48 × 100 [1] = 125 (R’s productivity is 25% higher) [1]. (b) 103 ÷ 110 × 100 [1] = 93.6 [1]. R’s export prices have fallen relative to the rival’s by about 6.4%, improving its price competitiveness [1]. [5] Examiner insight: Divide own by rival, not the reverse, and give an interpretation; a bare number does not say which country gained.

5. Reason 1: strong demand with a high income elasticity of demand for imports [1]; as income rises imports grow faster than exports [1]; the goods and services balance worsens [1]. Reason 2: unit labour costs rising faster than productivity [1]; export prices become uncompetitive and imports cheaper than home goods [1]; exports fall and imports rise [1]. [6] Examiner insight: Each reason needs a developed chain ending in the balance; two listed causes with no development gain little.

6. Expenditure-reducing policies cut total demand, including demand for imports [1]; for example, higher taxes or interest rates [1]. Expenditure-switching policies move spending from imports to domestic goods [1]; for example, tariffs or a lower exchange rate [1]. [4] Examiner insight: A definition and an example both matter; make clear which effect on spending each policy targets.

7. (a) Rise in imports = 1.5 × 6% = 9% [1]. New imports = 80 × 1.09 [1] = 87.2 [1]. (b) Balance = 72 - 87.2 [1] = -15.2 billion cu (a deficit, up from 8) [1]. [5] Examiner insight: Use the elasticity to find the percentage change first; going straight to the value invites an arithmetic slip, and showing steps keeps your method visible.

8. (a) Better infrastructure lowers transport, energy or communication costs and delays [1]; this reduces unit costs, allowing lower prices or higher profit [1]; reliable delivery also improves non-price competitiveness [1]. (b) Better skills raise output per worker [1]; if pay grows more slowly than output, unit labour costs fall [1]; skilled workers support higher-quality products [1]. [6] Examiner insight: Link each factor to a measure of competitiveness (unit costs, price or quality) rather than just saying “more competitive”.

9. (a) Borrowing = 4 × 20 = 80 [1]; liabilities = 120 + 80 = 200 [1]. (b) Interest before = 120 × 0.05 = 6 [1]; after = 200 × 0.05 = 10, a rise of 4 [1]. (c) Reason 1: deficit countries become dependent on foreign lenders [1], so a loss of confidence can cause capital flight and a currency crash that spreads abroad [1]. Reason 2: surplus countries are exposed to default by borrowers [1] and the imbalances raise pressure for protectionism [1]. [8] Examiner insight: Keep calculations separate from the explanation, and tie (c) to the world economy rather than only to Country T.

10. Problem 1: a persistent current account deficit as exports lose out [1], which must be financed by borrowing or asset sales [1]. Problem 2: firms in traded industries close, causing unemployment and lost output [1], which lowers growth and incomes [1]. [4] Examiner insight: Two distinct problems are needed; do not split one problem into two points.

11. Education and training raise human capital and productivity [1]. If pay does not rise as fast as output, unit labour costs fall [1], export prices fall and product quality improves [1]. The gains are lasting and support higher-value industries, unlike a lower exchange rate, which can be offset [1]. However, benefits take years [1], and cost, skills mismatch and emigration of trained workers reduce the return [1]. A lower exchange rate acts faster [1] but raises import costs and inflation [1]. Investment incentives, infrastructure and deregulation complement training [1]. Judgement: training is most effective for a lasting fix to a structural weakness, but the best choice depends on the cause and time horizon, usually a mix of policies [1]. [10] Examiner insight: Reaching a judgement that names the condition on which your answer depends is more convincing than a one-sided list.

Where marks are usually lost

• Writing “balance of payments deficit” without saying which account is meant.
• Getting the sign wrong when the financial account balances the current account.
• Dividing rival by own when calculating relative measures.
• Comparing unit labour costs without allowing for productivity or the exchange rate.
• Giving causes and policies with no chain of reasoning to the balance.
• Offering two points that are really one in a “two reasons” question.
• Evaluating with unsupported phrases such as “it depends” and no stated condition.

Next steps

• Review the revision notes and the study guide.
• Course hub: Edexcel A Level Economics; printable checklist.
• Take one of our free 10-minute diagnostics to find your weakest areas.
• Book a free trial class.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, Pearson Education Limited: section 4.3.3, statements 1 (a-d) and 3 (a-d).