OCR GCSE Economics: Why countries trade, trade agreements and the current account (J205) – Revision Notes

Condensed notes for OCR GCSE (9-1) Economics (J205), Version 2.0 (June 2026), sections 4.1 and 4.2. For full explanations and longer worked examples, read the study guide. Then try the practice questions. Course page: OCR GCSE Economics. Printable checklist. Unsure where you stand? Take a free diagnostic. All numbers below are invented for illustration.

Key definitions

Term	Meaning
Export	A good or service sold to another country
Import	A good or service bought from another country
Tariff	A tax on imports
Quota	A limit on the quantity of an import
Free trade	Trade without tariffs, quotas or similar barriers
Free trade agreement	A deal to remove or cut barriers between members
Customs union	Members share a common tariff on imports from outside
Single market	Goods, services, capital and people move freely between members
Current account	Record of trade in goods and services, plus income flows and transfers
Deficit	Debits exceed credits (balance below zero)
Surplus	Credits exceed debits (balance above zero)
Balanced	Credits equal debits (balance of zero)

4.1 Why countries trade

• Import because: resources lacking at home, lower prices, variety, inputs for firms.
• Export because: a larger market, specialisation, earning foreign currency to pay for imports.
• Consumers gain: lower prices, more choice, better quality through competition.
• Producers gain: bigger market, economies of scale, cheaper inputs, pressure to innovate.
• Costs: job losses in industries facing imports, dependence on other countries, extra transport pollution.

4.1 Free trade agreements and the EU

• A free trade agreement removes or lowers barriers between members; members keep their own barriers against others.
• The EU is more than this: a single market plus a customs union with a common external tariff.
• Benefits: cheaper goods, wider markets, more competition, more investment.
• Drawbacks: protection lost, jobs at risk in weaker industries, rules and checks cost time and money, some national control given up.
• The UK left the EU. Its trade with the EU is now governed by a trade agreement, and the EU remains a very important market.

4.2 The current account in four parts

Part	Example credit	Example debit
Goods	Selling machinery abroad	Buying foreign cars
Services	A foreign tourist spending in the country	A firm paying a foreign insurer
Primary income	Profits sent home by a firm’s overseas branch	Profits sent abroad by a foreign-owned firm
Secondary income	Money sent home by workers abroad	Overseas aid paid

Balance = total credits - total debits. Positive is a surplus, negative a deficit, zero balanced.

Method in steps

1. Find the balance for each part: credit minus debit.
2. Add the four balances, or total all credits and all debits then subtract.
3. State surplus or deficit and the size, with units.
4. Where asked, divide by GDP and multiply by 100 to give the percentage.

Worked reminder

Country A, CU billion: goods 150 in, 175 out; services 60 in, 40 out; primary income 18 in, 10 out; secondary income 5 in, 16 out.

Goods:     150 - 175 = -25
Services:   60 - 40  = +20
Primary:    18 - 10  =  +8
Secondary:   5 - 16  = -11
Total credits 233, total debits 241, balance -8

Country A has a current account deficit of CU 8 billion.

Worked reminder: price effect of removing a tariff

A tariff of 25% is charged on an imported item with a pre-tax price of 48. The shelf price is 48 x 1.25 = 60. When the tariff is removed, the price falls by (60 - 48) / 60 x 100 = 20%.

Chain of reasoning: a free trade agreement and a producer

1. Tariffs on exports to the partner country are removed.
2. The price paid by foreign buyers falls.
3. Quantity demanded abroad rises, so the firm sells more.
4. Higher output can lower the cost of each unit (economies of scale).
5. Revenue and profit may rise, which can support jobs and investment.
6. Evaluation: the firm also faces more competition at home, so gains depend on how competitive it is.

Analysing export and import data

• Quote figures from the table and calculate change.
• Percentage change = (new - old) / old x 100. Always divide by the old value.
• Compare exports with imports in each year; note when the balance switches between deficit and surplus.
• Say whether it covers goods, services or both.
• Link a change to a plausible cause, then say what extra data you would need.

Worked reminder: a short trend

Country G, goods and services, CU billion.

Year	1	2	3
Exports	80	88	90
Imports	96	92	95
Balance	-16	-4	-5

Exports rose by (90 - 80) / 80 x 100 = 12.5% from year 1 to year 3; imports fell by 1.0%. The deficit shrank sharply in year 2, then widened slightly in year 3. A strong answer notes both movements and suggests a cause, such as weaker home demand, while saying more years of data would be needed to confirm a trend.

Causes of deficits and surpluses

Deficit more likely	Surplus more likely
Strong exchange rate	Weaker exchange rate
Fast growth in household spending	Weak domestic spending
Low productivity or high inflation	Strong productivity and low inflation
Weak growth in trading partners	Strong demand from trading partners
Few natural resources	Resources to export, such as energy

Chain of reasoning: a high-spending boom causing a deficit

1. Household incomes and confidence rise.
2. People buy more goods, including imported ones.
3. Imports (debits) rise faster than exports (credits).
4. The current account moves towards deficit.
5. Evaluation: if the imports are mostly machinery for firms, the deficit may help future growth, so the cause matters as much as the size.

Evaluating the UK current account

• Matters because: the UK is open to trade, a persistent deficit has to be financed by borrowing or selling assets, the currency may come under pressure, and exports support jobs.
• Matters less because: deficits may fund investment, size is more important than sign, and other objectives can matter more.
• Judgement: it matters most when the deficit is large, long-lasting and caused by weak competitiveness. Say so, then justify.

Using the command words

• Explain: give a reason and develop it with a link, for example “imports rise, so debits rise, so the deficit widens”.
• Calculate: show the working and finish with the unit or the percentage sign.
• Analyse: break the issue into causes and effects, and use the data supplied.
• Evaluate: weigh both sides, consider size, cause and time period, and reach a supported judgement.

Must-know distinctions

• Free trade agreement versus EU: the EU has a single market and common external tariff.
• Balance of trade versus current account: the current account also includes income and transfers.
• Deficit in one year versus a persistent deficit: persistence is what raises concern.
• Size in billions versus size as a share of GDP.

Quick self-test

1. Define a current account surplus.
2. Exports of goods are 90 and imports of goods are 104. State the balance on goods.
3. Imports rise from 200 to 230. Calculate the percentage change.
4. Exports fall from 55 to 44. Calculate the percentage change.
5. Give two benefits of trade for consumers.
6. Give two benefits of a larger market for a producer.
7. Which part of the current account records overseas aid paid?
8. State one difference between the EU and a simple free trade agreement.
9. Explain one way a strong exchange rate can cause a deficit.
10. A deficit of 36 occurs with GDP of 900. Express it as a percentage of GDP.

Answers

1. Credits exceed debits on the current account.
2. 90 - 104 = -14, a deficit on goods of 14.
3. (230 - 200) / 200 x 100 = 15%.
4. (44 - 55) / 55 x 100 = -20%, a 20% fall.
5. Lower prices; wider choice (or better quality).
6. More sales and revenue; lower cost per unit through economies of scale.
7. Secondary income (as a debit).
8. The EU has a single market and a common external tariff; a basic agreement only cuts barriers.
9. Exports become dearer for foreign buyers, so fewer are sold, while imports become cheaper, so more are bought; debits rise relative to credits.
10. 36 / 900 x 100 = 4%.

Where marks are usually lost

• Using the balance of trade when the current account is asked for.
• Forgetting the sign: a deficit is negative, and the answer should say “deficit”.
• Leaving out units such as CU billion.
• Dividing by the new value when finding percentage change.
• Describing the EU only as “a free trade area” and missing the common external tariff.
• Calling every deficit harmful, with no comment on size, cause or duration.
• Quoting the table without calculating anything when the command word is analyse.
• Evaluation with no judgement: a final sentence that picks a side and gives a reason tends to earn more than a list of points.

Official syllabus

OCR, Cambridge OCR Level 1/Level 2 GCSE (9-1) in Economics (J205), Version 2.0 (June 2026), first assessment 2019, sections 4.1 and 4.2.