Pearson Edexcel International GCSE Economics: The current account (4EC1) – Revision Notes

These notes condense statement 2.1.1 d) of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3. It is examined in the macroeconomics paper, and no tiers apply. For full explanations read the study guide, then test yourself with the practice questions. The course hub, the printable checklist and the free diagnostics help you plan your revision. The countries and figures are made up.

Key terms

Term	Definition
Balance of payments	A record of all money flowing into and out of a country in a period
Current account	The part of the balance of payments recording trade in goods and services
Current account surplus	More money coming in than going out on trade in goods and services
Current account deficit	More money going out than coming in on trade in goods and services
Visibles	Traded goods
Invisibles	Traded services, such as tourism, banking and insurance
Exchange rate	The price of a unit of one currency, stated in another currency
Depreciation	The currency buys less foreign currency than before
Appreciation	The currency buys more foreign currency than before
Foreign reserves	Stocks of foreign currency held to pay for imports and other overseas payments

Formulae

Item	Formula
Visible balance	Visible exports - visible imports
Invisible balance	Invisible exports - invisible imports
Current account balance	Visible balance + invisible balance
Balance as % of GDP	Balance / GDP x 100
Percentage change in a rate	(new - old) / old x 100
Years reserves last	Reserves / annual deficit (if reserves alone fund it)

Method in steps: find the balance

1. Subtract visible imports from visible exports.
2. Subtract invisible imports from invisible exports.
3. Add the two answers, keeping the signs.
4. State the result as a surplus (positive), a deficit (negative) or balance (zero), with units.

Worked reminder: Country S has visible exports 54 and imports 61, invisible exports 22 and imports 15 (illustrative). Visible = -7, invisible = +7, total = 0, so the account is in balance.

Which direction does the money go?

Transaction	Counts as
A foreign firm buys a country’s machinery	Visible export
A resident buys a foreign phone	Visible import
A foreign tourist stays in a hotel at home	Invisible export
A resident buys foreign insurance	Invisible import
A foreign company uses a home bank	Invisible export

Test: does the money come in (export) or go out (import)? Is the thing bought a good (visible) or a service (invisible)?

Exchange rates and the current account

Method in steps: convert and compare

1. Write the rate as 1 unit of home currency = x units of foreign currency.
2. Foreign price of an export = home price x x.
3. Home price of an import = foreign price / x.
4. Compare before and after using (new - old) / old x 100.

Worked reminder: 1 pel = 2.00 gem. An export costs 50 pels, so it costs 100 gem. The pel falls to 1.60 gem. The export now costs 50 x 1.60 = 80 gem, a fall of 20%. An import costing 90 gem went from 90 / 2.00 = 45 pels to 90 / 1.60 = 56.25 pels, a rise of 25%.

Change in the home currency	Exports	Imports	Current account tends to
Depreciation	Cheaper abroad	Dearer at home	Improve
Appreciation	Dearer abroad	Cheaper at home	Worsen

The link in the other direction

Under a market-determined rate, a deficit means the supply of the home currency (to buy imports) exceeds demand (to buy exports), so the currency tends to fall. A surplus means demand exceeds supply, so it tends to rise. A falling currency then helps to reduce the deficit. These are tendencies, and the outcome depends on how strongly buyers respond to price changes.

Real-world rates

• A quote written as A/B means the number of units of B that 1 unit of A buys.
• Multiply to go from A to B. Divide to go from B to A.
• Practise with a current quotation from a bank, newspaper or website. Rates change daily, so use a fresh one each time and check whether the currency has gone up or down.

Reasons for deficits and surpluses

Cause	Deficit if	Surplus if
Quality of domestic goods	Poor: buyers switch to imports	Good: exports sell well
Quality of foreign goods	High: more imports	Low: fewer imports
Price of domestic goods	High relative to rivals	Low relative to rivals
Price of foreign goods	Low: imports attractive	High: imports unattractive
Exchange rate	Rises: exports dearer, imports cheaper	Falls: exports cheaper, imports dearer

Chain of reasoning to write out: cause, then buyer response, then change in exports or imports, then effect on the balance.

Impact of a deficit

1. Leakage. Imports take money out of the circular flow of income. More leaving than entering means less spending in the home economy.
2. Inflationary if prices rise abroad. Imported materials cost more. Firms may raise their selling prices.
3. Low demand for exports. Exporters sell less, so they may cut output and jobs.
4. Problems finding foreign reserves. Deficits are paid from reserves or by borrowing. Reserves can run out.

Worked reminder: reserves of 45 and a deficit of 9 a year last 45 / 9 = 5 years. A deficit of 8 on GDP of 400 is 8 / 400 x 100 = 2.0% of GDP.

Evaluation points

• A small deficit relative to GDP may be easy to fund.
• The reason matters: imports of machinery may raise future output, while imports of consumer goods may not.
• A surplus is not free of cost: the country gives up goods it could have enjoyed, and a stronger currency can hurt exporters.
• A high or rising deficit as a share of GDP is more worrying than one that is small and stable.

Model chain of reasoning

Question type: explain why a country might run a current account deficit.

1. State the cause: the country’s clothing is of lower quality than imported clothing.
2. Show the buyer response: consumers at home switch to the foreign product and foreign buyers do not choose the home product.
3. Show the effect: imports of clothing rise and exports fall.
4. Link to the account: money leaving for visibles exceeds money entering, so the visible balance, and perhaps the whole current account, moves into deficit.
5. Add context if given: for example, a strong currency makes the imported clothing cheaper still, which strengthens the effect.

Extension to a consequence: lower export sales mean exporting firms earn less, may cut output and jobs, and the deficit must be funded from foreign reserves, which are limited.

Must-know distinctions

Pair	Difference
Visible vs invisible	Goods vs services
Depreciation vs deflation	A fall in a currency’s value vs a fall in the general price level
Surplus vs balance	Inflows exceed outflows vs inflows equal outflows
Foreign tourist visiting vs resident travelling abroad	Invisible export vs invisible import

Self-test questions

1. Define the current account.
2. Classify: a foreign student paying fees at a home university.
3. Visible exports 80, visible imports 95, invisible exports 31, invisible imports 20. Find the current account balance.
4. Express a deficit of 12 as a percentage of GDP of 600.
5. 1 pel = 2.50 gem. Find the gem price of an export costing 40 pels.
6. The pel falls to 1 pel = 2.00 gem. Find the percentage change and the new gem price of the export.
7. State one way poor domestic quality leads to a deficit.
8. Explain how a deficit can be inflationary.
9. A country holds reserves of 36 and runs a deficit of 9 a year. How long do they last?
10. Give one reason a deficit might not be a serious problem.

Answers

1. The part of the balance of payments that records trade in goods and services with the rest of the world.
2. Invisible export, because money comes in for a service.
3. Visible = 80 - 95 = -15. Invisible = 31 - 20 = +11. Total = -4, a deficit.
4. 12 / 600 x 100 = 2.0%.
5. 40 x 2.50 = 100 gem.
6. (2.00 - 2.50) / 2.50 x 100 = -20%. New price = 40 x 2.00 = 80 gem.
7. Buyers switch to imported goods, so imports rise and exports fall.
8. Imported materials cost more when foreign prices rise or the currency falls, so firms raise their prices.
9. 36 / 9 = 4 years.
10. It is small relative to GDP, or it is funding imports of machinery that raise future output.

Where marks are usually lost

• Saying “imports are bad” without linking to the money leaving the economy.
• Reversing the direction of a depreciation: the price of exports abroad falls.
• Leaving out the sign or the word deficit or surplus after a calculation.
• Writing “services” but giving no example, when asked to explain invisibles.
• Using only price as a reason and ignoring quality.
• Listing the four impacts without explaining how each one works.
• Forgetting units, such as billions of the local currency.
• Giving an evaluation point that is not tied to the context given.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1) specification, Issue 3, February 2026, published by Pearson Education Limited, section 2.1.1 d).