OCR A Level Economics: The balance of payments (H460) – Revision Notes

These notes condense the topic Balance of payments from the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessed in 2021. It sits in Component 2, Macroeconomics, under The global context. Nothing is labelled AS or Extension. For full explanations, read the study guide. Test yourself with the practice set. Other links: the hub for OCR A Level Economics, the printable checklist and the free diagnostics. All figures are invented.

Definitions

Term	Meaning
Balance of payments	The account of every payment crossing a country’s border, in either direction, in a stated time span
Credit and debit	Credit: money flowing in. Debit: money flowing out
Balance	Credits minus debits. Positive is a surplus, negative is a deficit
Current account	Trade in goods, trade in services, income, current transfers
Capital account	Small capital transfers and non-produced, non-financial assets
Financial account	Direct investment, portfolio investment, other investment (loans, deposits), reserves
Errors and omissions	The balancing item that makes the total zero
Imbalance	A persistent surplus or deficit, rather than a position near zero
Sustainable position	One that can be maintained without painful adjustment

Accounting identity: current account + capital account + financial account + errors and omissions = 0. A deficit on the current account is matched by net inflows elsewhere. In this page a net inflow on the financial account is positive.

The current account at a glance

Component	Credit	Debit
Goods	Exports of products	Imports of products
Services	Tourism spending by visitors, insurance sold abroad	Residents’ overseas travel
Income	Profit and interest received from abroad	Profit and interest paid abroad
Current transfers	Migrants’ remittances received	Aid given, payments to international bodies

Method: calculating balances

1. Write credits and debits for each component.
2. Subtract: balance = credits − debits. Keep the sign.
3. Goods and services balance = goods balance + services balance.
4. Current account balance = goods + services + income + current transfers.
5. Percentage of GDP = balance ÷ GDP × 100.
6. To find the financial account: financial = −(current + capital + errors and omissions).

Worked reminder. Country N, Year 1 (illustrative), cu bn. GDP 900.

Component	Credits	Debits	Balance
Goods	120	150	−30
Services	60	35	+25
Income	18	30	−12
Current transfers	5	11	−6

Current account: −30 + 25 − 12 − 6 = −23, which is 23 ÷ 900 × 100 = 2.6% of GDP. Capital account +1, errors and omissions −2. Financial account = −(−23 + 1 − 2) = +24.

Check: −23 + 1 + 24 − 2 = 0.

Why a sustainable position matters

• A deficit financed by borrowing adds to foreign liabilities, and the interest and profit paid abroad worsen the income balance.
• Large deficits put downward pressure on the currency, raising import prices.
• Lenders may lose confidence, and short-term inflows can leave quickly.
• The government may be forced into policies that conflict with growth and employment.
• A persistent surplus can cause overheating at home and retaliation abroad.

Causes of imbalances

Type	Cause	Direction
Cyclical	Domestic boom raises import demand	Deficit
Cyclical	Recession abroad cuts export demand	Deficit
Structural	High unit labour costs, low productivity	Deficit
Structural	Overvalued currency	Deficit
Structural	Poor quality, non-price weakness	Deficit
Structural	Dependence on one or two exports whose prices fall	Deficit
Structural	Low savings, high consumption	Deficit
Structural	High foreign ownership of firms, so large profit outflows	Income deficit
Structural	Strong competitiveness, high saving, undervalued currency	Surplus

Formula for the effect of growth on trade. Percentage change in imports = YED of imports × percentage change in domestic income. Percentage change in exports = YED of exports × percentage change in foreign income.

Worked reminder. Country N’s imports of goods are 150, YED of imports 1.5, domestic income grows 4%. Imports rise 1.5 × 4 = 6%, which is 150 × 0.06 = 9. New imports 159.

Consequences

• Deficit: rising foreign liabilities; income outflows; currency weakness and import-price inflation; pressure to cut demand; leakage of demand from domestic producers.
• Surplus: growing overseas assets; upward pressure on the currency; export-led jobs; risk of inflation and trade disputes; weak domestic consumption.

Policies to correct a deficit

Group	Examples	Strength	Weakness
Expenditure-reducing	Higher taxes, lower spending, higher interest rates	Act fairly quickly on imports	Cost output and jobs; blunt
Expenditure-switching	Lower exchange rate, tariffs, quotas	Redirect spending to home goods	Depend on price responsiveness; retaliation; raise inflation
Supply-side	Training, infrastructure, research and development	Lasting competitiveness gains	Slow, costly, uncertain

Method for the multiplier route.

1. Find the multiplier as the reciprocal of the sum of the three leakage rates (saving, tax, imports).
2. Multiply the spending change by it to get the income change.
3. Multiply that income change by the import rate to get the change in imports.

Worked reminder. MPS 0.2, MPT 0.2, MPM 0.2. Multiplier = 1 ÷ 0.6 = 1.67. Spending cut of 9 gives income down 15 and imports down 0.2 × 15 = 3.

Unit labour cost = wage per hour ÷ output per hour. If a wage of 30 is paired with output of 20, ULC is 1.50. Wage +3% and output +9%: 30.9 ÷ 21.8 = 1.42, a fall of 5.5%.

Chains of reasoning to rehearse

Write each chain as a sequence, then add a judgement.

Deficit from a domestic boom. Income rises, so spending on imports rises, so imports exceed exports and the goods balance worsens. If the boom is temporary, the deficit closes when growth slows. Judgement: little need for action unless financing becomes difficult.

Deficit from weak competitiveness. Unit labour costs are high, so export prices are high and imports are relatively cheap, so the trade balance worsens, so the deficit persists. Judgement: a structural problem that needs supply-side action, because demand cuts only treat the symptom.

Deficit leading to inflation. A large deficit means heavy supply of the domestic currency, so the currency weakens, so imports cost more, so cost-push inflation appears, so real incomes fall. Judgement: depends on how much of the economy’s spending is on imports.

Deficit financed by short-term inflows. Portfolio investors supply funds while confidence lasts. If confidence goes, funds leave, the currency falls and interest rates may have to rise. Judgement: riskier than a deficit financed by long-term direct investment.

Surplus. Strong exports and high saving give a surplus, so the currency tends to rise, so exporters lose price competitiveness, so the surplus narrows. Judgement: a surplus is self-correcting only if the currency can move freely.

Reading data questions

• Identify which account and which component each figure belongs to before calculating.
• Check whether the data show a balance or the credits and debits behind it.
• Compare years using percentages of GDP, not raw values, if GDP changes.
• Note any sign convention stated in the data and follow it.
• When a question gives two years, calculate the change in each component, then say which component drove the change in the total.

Worked reminder. Country N, Year 2 (illustrative): goods balance −34, services +27, income −10, current transfers −6. Current account = −34 + 27 − 10 − 6 = −23. The total is unchanged from Year 1 (−23) although the parts moved: goods worsened by 4, services improved by 2, income improved by 2 and transfers did not change (−4 + 2 + 2 + 0 = 0).

Must-know distinctions

• Current account versus the whole balance of payments. The whole always sums to zero.
• Cyclical versus structural. Cyclical imbalances close as the cycle turns. Structural ones need policy.
• Expenditure-reducing versus expenditure-switching. The first lowers total demand, the second shifts it from foreign to home goods.
• Deficit versus a deficit as a percentage of GDP. Always scale.

Evaluation toolkit

Ask: how big, how long, how financed, what caused it, how fast the policy works, what it costs elsewhere, and what other countries do in response.

Quick self-test

1. State the three accounts of the balance of payments.
2. Goods credits 80, debits 95. Find the goods balance.
3. Services balance +14, income −9, current transfers −4, goods −11. Find the current account balance.
4. A current account deficit of 18 on GDP of 600: what is it as a percentage of GDP?
5. With current account −18, capital account +2, errors and omissions +1, find the financial account balance.
6. Give one example of a current transfer.
7. Imports of 200 with a YED of 2 and income growth of 3%. By how much do imports rise?
8. MPS 0.1, MPT 0.3, MPM 0.1. Find the multiplier.
9. Name one cyclical and one structural cause of a deficit.
10. Give one weakness of using higher interest rates to correct a deficit.

Answers

1. Current, capital, financial.
2. 80 − 95 = −15.
3. −11 + 14 − 9 − 4 = −10.
4. 18 ÷ 600 × 100 = 3.0%.
5. −(−18 + 2 + 1) = +15.
6. Remittances sent home by migrant workers, or foreign aid.
7. 2 × 3 = 6%, so 200 × 0.06 = 12.
8. 1 ÷ (0.1 + 0.3 + 0.1) = 1 ÷ 0.5 = 2.
9. Cyclical: a domestic boom. Structural: high unit labour costs.
10. It slows growth and raises unemployment, and may attract short-term capital that raises the exchange rate and hurts exporters.

Where marks are usually lost

• Calling the current account deficit “the balance of payments deficit”.
• Subtracting the wrong way round and losing the sign.
• Leaving out income or current transfers from the current account balance.
• Quoting a balance without scaling it by GDP when asked about seriousness.
• Listing policies without saying which cause each addresses.
• Treating all deficits as harmful without considering financing and cause.
• Giving a policy and no counterweight: cost to growth, jobs or inflation.
• Ignoring time: supply-side effects are slow, demand-side effects faster.

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.