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

This guide follows the OCR GCSE (9-1) Economics specification (J205), Version 2.0 (June 2026), sections 4.1 and 4.2 of “International trade and the global economy”. The qualification has no tiers, so all of this applies to every candidate. All figures in worked examples are invented and illustrative; none are real statistics.

Use it with the revision notes and the practice questions. The course page is OCR GCSE Economics, the printable list is the checklist, and the free diagnostics show where to start. Demand, supply and elasticity are in the markets and money guide.

What this unit covers

Spec	You must be able to
4.1	Explain why countries import and export, and the benefits for consumers and producers
4.1	Explain free trade agreements, including the European Union
4.2	Explain the balance of payments on current account
4.2	Explain a balanced current account, a surplus and a deficit
4.2	Calculate deficits and surpluses
4.2	Analyse recent and historical data on exports and imports
4.2	Evaluate the importance of the current account to the UK economy
4.2	Evaluate the causes of surpluses and deficits

An export is any good or service sold abroad; an import is any good or service the country buys from abroad.

4.1 Why countries import and export

No country can make everything well. Trade lets each country sell what it makes efficiently and buy the rest.

Why countries import

• Resources they lack. Climate, soil or minerals make some goods impossible or very costly to produce at home.
• Lower prices. Overseas producers may have cheaper labour, better technology or bigger factories.
• Variety. Households want more choice than domestic firms offer.
• Inputs for firms. Producers import parts, machinery and materials to make their own output.

Why countries export

• A bigger market. Home demand may be small, so selling abroad raises sales.
• Specialisation. A country concentrates on goods and services it produces efficiently, then sells the surplus abroad.
• Earning foreign currency. Export revenue pays for imports.

Benefits for consumers

• Lower prices, because foreign competition pushes domestic firms to keep prices down.
• Wider choice and access to goods that are not produced at home.
• Better quality, because firms must compete.

Benefits for producers

• A larger market, so higher sales and revenue.
• Economies of scale: as output rises, the cost of each unit can fall.
• Cheaper or better inputs, which lower costs.
• Pressure to improve efficiency and innovate.

Worked example 1: a tariff removed (illustrative)

A tariff is a tax on imports. Imported tinned fruit costs CU 48 before tax. A 25% tariff makes the shelf price CU 60.

Price with tariff = 48 x 1.25 = 60
After tariff removed = 48
Fall = (60 - 48) / 60 x 100 = 20%
A household buying 25 tins saves 25 x 12 = 300

Notice that a 25% tax produces only a 20% fall when removed, because the percentage is taken from a higher starting price.

Worked example 2: an exporter gains a larger market (illustrative)

A small firm in Country B sells 2,000 units at CU 15 and each unit costs CU 11. A trade deal opens a partner market and it sells 2,600 units. Higher output cuts unit cost to CU 10.

Revenue before = 2,000 x 15 = 30,000     Revenue after = 2,600 x 15 = 39,000
Change in revenue = 9,000 / 30,000 = 30% rise
Cost before = 2,000 x 11 = 22,000        Cost after = 2,600 x 10 = 26,000
Profit before = 8,000                    Profit after = 13,000   (62.5% rise)

Costs of trade (for evaluation)

Trade is not painless. Domestic firms facing cheaper imports may shrink or close, and their workers may lose jobs. Workers who lose jobs in one industry often need retraining before they can find work in another. A country that relies on imported essentials can be hit by shortages or price rises abroad. Long transport routes add pollution.

4.1 Free trade agreements and the European Union

Free trade means goods and services move between countries without tariffs, quotas or other barriers. A quota limits the quantity that may be imported.

A free trade agreement is a deal between countries to remove or reduce these barriers on trade between them. Each member usually keeps its own barriers against non-members.

Benefits

• Lower prices for consumers, and more choice.
• Wider markets for producers, who can sell in member countries without tariffs.
• More competition, which encourages efficiency.
• More investment, because firms can serve several markets from one base.

Drawbacks

• Domestic industries lose protection and may decline.
• Jobs may be lost in the industries that cannot compete.
• Trade with countries outside the agreement may be harder.
• Agreements need rules and checks, which cost time and money.

The European Union

The European Union (EU) is a group of European countries that goes further than a simple free trade agreement. It has a single market, in which goods, services, capital and people can move between members with few barriers. It also has a customs union: members charge a common tariff on imports from outside the EU. The UK was a member until it left the EU, and its trade with the EU is now governed by a trade agreement. Trade with the EU is still very important for UK firms.

Link the EU to the benefits above, then weigh them against drawbacks such as loss of national control over some rules and the cost of membership.

4.2 The balance of payments on current account

The balance of payments records all money flowing into and out of a country. The current account is the part covering day-to-day flows. It has four parts.

Part	Credit (money in)	Debit (money out)
Trade in goods	Exports of goods	Imports of goods
Trade in services	Exports of services, such as tourists spending in the country	Imports of services, such as a firm paying a foreign shipping company
Primary income	Profits, interest and wages earned from abroad	Profits, interest and wages paid abroad
Secondary income	Transfers received, such as gifts from overseas	Transfers paid, such as overseas aid

Balance on current account = total credits - total debits.

• Balanced: credits equal debits, so the balance is zero.
• Surplus: credits exceed debits, so the balance is positive.
• Deficit: debits exceed credits, so the balance is negative.

Worked example 3: calculating the balance (illustrative)

Country A, one year, CU billion:

Part	Credits	Debits	Balance
Goods	310	365	-55
Services	190	120	+70
Primary income	95	110	-15
Secondary income	20	45	-25
Total	615	640	-25

The current account is in deficit by CU 25 billion. Goods and services together show a surplus of 15, but net income flows of -40 turn it into a deficit. If GDP is CU 1,250 billion, the deficit is 25 / 1,250 = 2.0% of GDP. Expressing it as a share of GDP helps you judge how large it is.

Analysing export and import data

Read the title and units first. Then look for the overall trend, the biggest changes, and any year where the balance switches between deficit and surplus. Calculate percentage changes and quote figures. Always ask whether the data covers goods, services or both.

Worked example 4: a trend table (illustrative)

Country B, exports and imports of goods and services, CU billion:

Year	1	2	3	4	5
Exports	120	128	131	150	158
Imports	140	139	152	149	151
Balance	-20	-11	-21	+1	+7

Exports grew by (158 - 120) / 120 = 31.7% over the period, but imports grew by only (151 - 140) / 140 = 7.9%. The deficit narrowed in year 2, widened in year 3, and moved to surplus in years 4 and 5. In year 4 exports rose 14.5% while imports fell, which explains the switch. Two years of surplus do not prove a lasting change.

Causes of deficits and surpluses

Causes of a deficit:

• Strong exchange rate. Exports become dearer for foreigners and imports cheaper at home.
• Fast domestic spending growth. Households buy more, including more imports.
• Low competitiveness. Weak productivity or higher inflation than competitors makes exports less attractive.
• Weak growth abroad. Overseas buyers cut demand for exports.
• Lack of resources. The country must import goods it cannot produce.

Causes of a surplus are the opposite: a weaker exchange rate, strong productivity, weak domestic demand, abundant resources to export, or investment income earned abroad.

Evaluating the importance of the current account to the UK

Points for importance:

• The UK is an open economy, so trade is a large part of income and jobs.
• A persistent deficit must be financed by borrowing from abroad or selling assets, which adds to what the country owes.
• Pressure on the value of the currency may follow.
• Export success supports jobs and growth.

Points against:

• A deficit is not automatically harmful: if imports are machinery, the country may be investing for future growth.
• A deficit of 2% of GDP is far smaller than one of 6%.
• Other objectives, such as inflation, unemployment and growth, may matter more in a given year.
• Foreign investors may be happy to fund a deficit for a long time.

Judgement. A good answer says the current account matters most when the deficit is large, persistent and caused by weak competitiveness rather than investment. Then it justifies that conclusion.

Worked example 5: same size, different meaning (illustrative)

Country E and Country F each have a deficit of CU 48 billion. E’s GDP is 800, so the deficit is 6.0% of GDP; F’s GDP is 1,200, so it is 4.0%. If E’s imports are mostly consumer goods and F’s are machinery, F’s deficit is less worrying, because the machines raise future output.

Common errors

• Writing “balance of trade” when asked for the current account: the current account also includes income and transfers.
• Calling a deficit “bad” without considering size, cause and duration.
• Treating the EU and a free trade agreement as identical. The EU adds a single market and a common external tariff.
• Dividing by the wrong year when calculating percentage change: always divide by the starting value.
• Quoting a trend without numbers when the question gives data.

Next steps

Test yourself with the practice questions, then use the revision notes for quick recall.

Official syllabus

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