OxfordAQA International AS and A-level Economics: The balance of payments (9640) – 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 follow section 3.4.2.1 (the balance of payments) of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, for International AS exams from May/June 2021 and International A-level exams from May/June 2022. Section 3.4 is the extra International A2 content. Every country and figure is invented for practice.

Learn the content first from the study guide and the revision notes. Use the OxfordAQA A-level Economics hub and the checklist to plan your work. For a quick check of weak areas, try the free 10-minute diagnostics.

Questions

1. Country M has these figures, in billions of M-units: goods credits 140 and debits 165; services credits 55 and debits 38; primary income credits 20 and debits 31; secondary income credits 8 and debits 12. GDP is 500.

(a) Find the combined balance on goods and services. [2] (b) Express the current account balance as a share of GDP. [2]

2. In Country M the capital account is +3 and the financial account is +17. Using your answer to question 1, calculate net errors and omissions, and state what this item represents. [3]

3. Compare foreign direct investment with portfolio investment, using an illustration of each. [4]

4. In Country N, each 1 rise in national income adds 0.15 to imports. The government wants imports to fall by 9 billion using expenditure-reducing policy. The multiplier is 2.5.

(a) Calculate the fall in income needed. [2] (b) Calculate the cut in aggregate demand needed. [2]

5. Country M has exports of 180 and imports of 200 (billions of M-units, goods and services). Its currency falls 5%. Export prices in M-units are unchanged and import prices in M-units rise 5%.

(a) Calculate the new trade balance if export PED is 2.0 and import PED is 0.8. [3] (b) Calculate the new trade balance if export PED is 0.4 and import PED is 0.3. [3]

6. A country runs a current account deficit of 3.5% of GDP each year. Nominal GDP grows 5% a year. Using deficit divided by growth, calculate the long-run level of foreign liabilities as a percentage of GDP, then the level if growth falls to 3.5%. Comment on what this shows. [4]

7. Explain two consequences of a persistent current account deficit. [4]

8. A foreign firm invests 90 million M-units in a plant in Country M. Each year it exports 25 million of output, imports 9 million of inputs and sends home profit equal to an 8% return on the investment.

(a) Calculate the yearly net effect on the current account. [3] (b) Explain one reason why FDI may be a more stable source of finance for a deficit than portfolio investment. [2]

9. The government of Country N imposes a 10% tariff on imported goods. Import demand has PED of 1.2 and the goods import bill, before tariff, was 300 billion N-units.

(a) Calculate the change in import volume and the new bill before tariff. [3] (b) Explain one reason why the tariff may not improve the balance of payments as much as this suggests. [1]

10. Using an illustration of each, say how policies that reduce expenditure differ from policies that switch it. [4]

11. Explain why a large and persistent current account surplus may be a problem for the country running it. [4]

12. Country M has a current account deficit of 40 billion M-units (5% of GDP), unemployment of 9%, inflation of 1.5% and growth of 0.8%. In the short run its export PED is estimated at 0.4 and import PED at 0.3. The government is deciding between cutting spending and raising taxes, a fall in the exchange rate, or supply-side policy. Evaluate which policy, or mix of policies, it should choose. [8]

Answers

1. (a) Goods = 140 - 165 = -25 [1]; services = 55 - 38 = +17, so trade balance = -25 + 17 = -8 [1]. [2] (b) Primary income = 20 - 31 = -11 and secondary income = 8 - 12 = -4, so current account = -8 - 11 - 4 = -23 [1]; -23 / 500 × 100 = -4.6% [1]. [2] Examiner insight: Show each balance before adding, and keep the signs. A bare total with no signs is hard to credit if one balance is wrong.

2. Current + capital + financial = -23 + 3 + 17 = -3 [1]; net errors and omissions = +3 [1]. It is the balancing item that makes the accounts sum to zero, covering mistakes and unrecorded transactions [1]. [3] Examiner insight: Answers gain credit for explaining why the item exists, not only for the number. State that the whole balance of payments sums to zero.

3. FDI is investment in real business operations abroad with a lasting interest and control [1], for example a firm building a factory [1]. Portfolio investment is the purchase of financial assets such as shares or bonds with no control [1], for example a pension fund buying government bonds [1]. [4] Examiner insight: A distinction needs both sides compared. The key contrast is control and permanence, so make it explicit.

4. (a) Fall in income = 9 / 0.15 = 60 billion [1] (method: fall in imports divided by the marginal propensity to import [1]). [2] (b) Cut in AD = 60 / 2.5 = 24 billion [1] (method: income fall divided by the multiplier [1]). [2] Examiner insight: Name the step you are doing: income first, then AD. Dividing 9 by 2.5 directly is a common slip.

5. (a) Exports = 180 × (1 + 2.0 × 0.05) = 180 × 1.10 = 198 [1]; imports = 200 × 1.05 × (1 - 0.8 × 0.05) = 200 × 1.05 × 0.96 = 201.60 [1]; balance = 198 - 201.60 = -3.60 (an improvement of 16.40) [1]. [3] (b) Exports = 180 × (1 + 0.4 × 0.05) = 183.60 [1]; imports = 200 × 1.05 × (1 - 0.3 × 0.05) = 200 × 1.05 × 0.985 = 206.85 [1]; balance = 183.60 - 206.85 = -23.25 (worse than -20) [1]. [3] Examiner insight: Show the volume change and the price change separately for imports. Comparing the two balances with the starting -20 makes the role of elasticity clear.

6. 3.5 / 5 × 100 = 70% of GDP [1]; at 3.5% growth, 3.5 / 3.5 × 100 = 100% [1]. Slower growth raises the long-run burden of the same deficit [1], so a deficit should be judged against growth in income, not as a fixed sum [1]. [4] Examiner insight: Finish with the interpretation. The idea is that sustainability depends on the deficit relative to income and growth.

7. Consequence one: the deficit has to be paid for by foreign lending or asset sales [1], so foreign claims rise and income flows abroad as interest and profit, which worsens the primary income balance [1]. Consequence two: if lenders lose confidence, inflows slow [1], which may force higher interest rates or a falling currency, with lower growth [1]. [4] Examiner insight: Strong answers chain the argument (cause, then effect, then result) and do not just list. One developed consequence is worth more than two bare ones.

8. (a) Profit sent abroad = 8% × 90 = 7.2 million [1]; net effect = 25 - 9 - 7.2 [1] = +8.8 million a year [1]. [3] (b) FDI is tied to physical operations and a long-term commitment [1], so it is hard to withdraw quickly, whereas portfolio investors can sell and leave at short notice [1]. [2] Examiner insight: Include the profit outflow in the current account calculation. Leaving it out gives +16, which ignores the primary income debit.

9. (a) Volume change = -1.2 × 10 = -12% [1]; new bill before tariff = 300 × 0.88 = 264 billion [1]; a fall of 36 billion [1]. [3] (b) Trading partners may retaliate with their own tariffs, cutting the country’s exports [1]. [1] Examiner insight: The tariff itself is not part of the foreign-currency bill, so state that your figure is before tariff. Any one sound limitation earns the mark.

10. Expenditure-reducing policy cuts total spending [1], for example higher taxes or interest rates, so that fewer imports are bought [1]. Expenditure-switching policy moves spending from imports to home-produced goods [1], for example a fall in the exchange rate or a tariff [1]. [4] Examiner insight: The distinction is about what happens to spending. Say whether total demand falls or only changes direction.

11. A surplus may reflect weak domestic demand and low consumption, so households do not enjoy the gains from trade [1]. Export-led demand can raise AD and cause inflation when the economy is near capacity [1]. Trading partners with the matching deficits may be pushed into debt or may respond with trade barriers [1]. Pressure for a higher currency can erode competitiveness [1]. [4] Examiner insight: Surplus questions often tempt a one-sided “surplus is good” answer. Answers that explain a cost with a mechanism gain more than assertions.

12. Cutting spending or raising taxes (expenditure-reducing) would lower imports [1], but with unemployment at 9% and growth of 0.8% it would deepen the weakness and conflict with employment [1]. A fall in the exchange rate raises import prices and lowers export prices [1]. With PEDs of 0.4 and 0.3 in the short run, the import bill rises more than export volume, so the deficit may worsen at first [1], though the effect improves if elasticities rise over time [1]. Inflation of only 1.5% leaves room for some imported inflation [1]. Supply-side policy raises productivity and quality, so competitiveness improves without cutting demand, but it is slow and costly and cannot fix the deficit quickly [1]. Judgement: with spare capacity and low inflation, a gentle depreciation combined with supply-side measures suits best and spending cuts should be avoided, though the choice depends on how quickly elasticities rise and whether the deficit is easy to finance [1]. [8] Examiner insight: Strong answers use the data given (unemployment, inflation, the elasticities) and reach a clear judgement with a reason. A list of policies without linking to the data is the weaker route.

Where marks are usually lost

• Naming a deficit without saying which account or giving its sign.
• Leaving out profit outflows when judging the effect of FDI on the current account.
• Applying elasticity to the wrong price: import prices rise in home currency when the currency falls.
• Dividing by the wrong figure when finding income or AD changes.
• Describing a policy without saying whether it cuts spending or switches it.
• Treating a currency fall as always successful when demand is inelastic in the short run.
• Ignoring the state of the economy, such as spare capacity, when choosing between policies.
• Giving one-sided answers on deficits and surpluses, with no judgement.

Next steps

• Go back over weak points in the revision notes and the study guide.
• Tick off what you can do on the checklist; the course hub lists related pages.
• Try all the free 10-minute diagnostics.
• Book a free trial class: trial.

Official syllabus

Source: OxfordAQA, International AS and A-level Economics (9640), specification version 1.2, for International AS exams from May/June 2021 onwards and International A-level exams from May/June 2022 onwards. These questions cover section 3.4.2.1.