OCR A Level Economics: The balance of payments (H460) – 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 the topic Balance of payments in the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessed in 2021, within Component 2, Macroeconomics. Nothing is labelled AS or Extension. All countries and figures are invented. Read the study guide first and keep the revision notes to hand. Related pages: the hub for OCR A Level Economics and the checklist. Take the free diagnostics to find weak spots.

Questions

1. Explain what is meant by the balance of payments. [2]

2. Distinguish between the current account, the capital account and the financial account. [3]

3. Country T, Year 5 (illustrative), cu bn. GDP is 2,400.

Component	Credits	Debits
Goods	310	355
Services	140	95
Income	52	71
Current transfers	9	33

(a) Calculate the balance on each of the four components. [4] (b) Calculate the current account balance. [1] (c) Express it as a percentage of GDP, to one decimal place. [1]

4. Using your answer to question 3, suppose Country T’s capital account balance is +2 and errors and omissions are −1. Calculate the financial account balance and state what it shows. [3]

5. Explain why a sustainable balance of payments position is an important macroeconomic policy objective. [4]

6. Country T’s goods imports are 355 and its goods exports are 310. Over the year T’s national income rises by 3%, and its imports have an income elasticity of 2.0. Incomes abroad rise by 4%, and T’s exports have an income elasticity of 0.5. Calculate the new goods balance and the change in it. [4]

7. Explain two possible causes of a persistent current account deficit. [6]

8. Country T’s marginal propensity to save is 0.2, to be taxed 0.3 and to import 0.3. The government cuts spending by 24 cu bn to reduce the deficit in question 3. Calculate the fall in imports and comment on the policy. [4]

9. An exporter in Country T pays 40 cu per hour and produces 16 units per hour. After a training programme, the wage rises 6% and output per hour rises 8%. Calculate the percentage change in unit labour cost. [4]

10. Country V has GDP of 800 cu bn and runs a current account deficit of 3% of GDP each year for four years, financed entirely by foreign borrowing. (a) Calculate the annual deficit, the total added to foreign liabilities, and the yearly interest at 5% on that total. [3] (b) Evaluate whether this deficit is likely to be a problem. [5]

11. The government of a country with a large current account deficit, caused mainly by high unit labour costs and low-quality exports, is choosing a policy. Evaluate policies to correct the deficit. [12]

12. Country U has a current account surplus of 2.2% of GDP. Its GDP is 1,500 cu bn. Calculate the surplus in cu bn and explain consequences of a persistent surplus. [6]

Answers

1. The account of all payments crossing the border, in both directions, in a stated period [1]. Inflows are credits and outflows are debits, and the whole account sums to zero once errors and omissions are included [1]. [2] Examiner insight: A definition that leaves out the time period, or never mentions flows in both directions, tends to earn less than one that includes both.

2. Current account: trade in goods and services, income and current transfers [1]. Capital account: small capital transfers and non-produced, non-financial assets [1]. Financial account: investment and lending flows such as direct investment, portfolio investment, loans and reserves [1]. [3] Examiner insight: “Distinguish” asks for a difference on each, so give a separate defining feature of each account rather than a list of examples alone.

3. (a) Goods: 310 − 355 = −45 [1]. Services: 140 − 95 = +45 [1]. Income: 52 − 71 = −19 [1]. Current transfers: 9 − 33 = −24 [1]. [4] (b) −45 + 45 − 19 − 24 = −43 cu bn [1]. [1] (c) 43 ÷ 2,400 × 100 = 1.8% deficit [1]. [1] Examiner insight: Show credits minus debits for each line and keep the sign. Working that is set out line by line lets a reader see where a slip occurred, which a bare final figure cannot do.

4. The accounts and errors and omissions sum to zero [1]. −43 + 2 + financial − 1 = 0 [1]. Financial account = +42, a net inflow, showing that the deficit is financed by foreigners buying assets or lending, or by drawing on reserves [1]. [3] Examiner insight: The sign convention matters. State the one you are using, and say what the number means as well as what it is.

5. A deficit financed by borrowing raises foreign liabilities [1], so more interest and profit flows abroad, worsening the income balance in future [1]. Persistent deficits put downward pressure on the currency [1], raising import prices and risking inflation, or force the government to cut demand to restore confidence [1]. [4] Examiner insight: Each point needs a reason connecting the imbalance to a macroeconomic effect. Saying “it is bad for the economy” without a chain tends to gain little.

6. Imports rise 2.0 × 3 = 6%, so 355 × 0.06 = 21.3 and new imports are 376.3 [1]. Exports rise 0.5 × 4 = 2%, so 310 × 0.02 = 6.2 and new exports are 316.2 [1]. New balance: 316.2 − 376.3 = −60.1 [1]. Change: −60.1 − (−45) = −15.1, a worsening [1]. [4] Examiner insight: Apply each elasticity to its own income change. Mixing up domestic and foreign growth is a common slip.

7. Cause 1: high unit labour costs or an overvalued currency [1]. Exports become dearer abroad and imports cheaper at home [1], so the trade balance worsens for as long as the competitiveness gap persists [1]. Cause 2: income-elastic demand for imports with income-inelastic demand for exports [1]. As incomes grow worldwide, imports rise faster than exports [1], so the deficit widens over time even without a change in prices [1]. [6] Examiner insight: Two developed causes beat several named ones. Name the cause, give a link to trade flows, and say whether it is lasting or temporary.

8. Multiplier = 1 ÷ (0.2 + 0.3 + 0.3) = 1 ÷ 0.8 = 1.25 [1]. Fall in income = 24 × 1.25 = 30 [1]. Fall in imports = 0.3 × 30 = 9 cu bn [1]. This closes about 21% of the 43 deficit while costing 30 of output, so it is costly and blunt [1]. [4] Examiner insight: The comment earns credit when it uses the numbers: set the improvement against the loss of income.

9. Initial unit labour cost = 40 ÷ 16 = 2.50 [1]. New wage = 40 × 1.06 = 42.4 and new output = 16 × 1.08 = 17.28 [1]. New unit labour cost = 42.4 ÷ 17.28 = 2.45 [1]. Change = −1.9% [1]. [4] Examiner insight: Unit labour cost is wage divided by output, not wage minus output. Calculate both levels before taking the percentage change.

10. (a) Annual deficit = 0.03 × 800 = 24 cu bn [1]. Total added over four years = 96 cu bn [1]. Yearly interest = 96 × 0.05 = 4.8 cu bn [1]. [3] (b) Against: borrowing builds liabilities and a permanent income outflow [1], which makes later deficits larger [1]. For: 3% is moderate and, if borrowing finances investment that raises future exports, the country can service the debt [1]. It depends on the cause and the financing: long-term direct investment is safer than short-term loans [1]. Judgement: likely manageable for now, but a problem if it persists and is financed by volatile funds [1]. [5] Examiner insight: An evaluation answer reaches a supported conclusion. Say what the problem depends on, then decide.

11. Expenditure-reducing: higher taxes, lower spending or higher interest rates reduce income and so imports [1]. The effect is small relative to the output lost, since only the import share of lost income is saved [1]. It raises unemployment and conflicts with growth [1]. It does nothing about the cause, which is uncompetitiveness [1]. Expenditure-switching: a lower exchange rate lowers export prices abroad and raises import prices [1]. Success depends on price elasticity of trade, and import prices rise, which can add to inflation [1]. Tariffs and quotas switch demand to home goods but invite retaliation and raise costs for firms [1]. Neither fixes poor quality [1]. Supply-side: training, investment and research and development raise productivity and reduce unit labour costs [1], and raise quality and non-price competitiveness [1]. They fit the cause directly but act slowly and cost the government [1]. Judgement: a mix suits the cause, with supply-side policy as the lasting remedy and short-term demand or exchange rate measures only as support, and the weights depending on how large and urgent the deficit is [1]. [12] Examiner insight: Link each policy to the stated causes in the stem. Answers that list policies in general terms and never return to the causes tend to stay descriptive.

12. Surplus = 0.022 × 1,500 = 33 cu bn [1]. Consequence 1: the surplus puts upward pressure on the currency [1], which makes exports dearer and may reduce export-led growth over time [1]. Consequence 2: strong export demand can overheat the economy and raise inflation [1], and partners with matching deficits may respond with protection [1]. Judgement: the surplus is usually less urgent than a deficit, but it can reflect weak domestic demand and risks conflict with partners [1]. [6] Examiner insight: Surpluses are imbalances too. Treat them with the same chain of reasoning as deficits rather than as a good thing by default.

Where marks are usually lost

• Treating “balance of payments deficit” as the same as a current account deficit.
• Dropping the sign on a balance or subtracting debits from credits.
• Leaving out income or current transfers from the current account.
• Quoting a deficit without scaling it by GDP when asked about its seriousness.
• Applying the wrong income change to the wrong elasticity.
• Listing causes or policies without a chain of reasoning.
• Giving a policy with no cost or counterweight.
• Reaching no judgement in an evaluation question.

Next steps

• Revise with the revision notes.
• Reread the study guide.
• Visit the course hub and print the checklist.
• Try all free 10-minute diagnostics at /diagnostics/.
• Book a free trial class at /trial/.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. Topic: Balance of payments, in Component 2, Macroeconomics.