OxfordAQA International AS and A-level Economics: Current account and conflicts (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 cover sections 3.2.3.4 and 3.2.3.5 of the OxfordAQA International AS and A-level Economics specification (version 1.2). Section 3.2 is International AS content. The countries and numbers are made up for illustration. Revise first with the study guide and revision notes. Links: course hub, checklist, free diagnostics.

Questions

1. Define a current account deficit. [2]

2. Country C has GDP of 1,300 billion C-units. Its goods exports are 310 and imports 340. Services exports are 120 and imports 85. Primary income credits are 30 and debits 41. Secondary income credits are 15 and debits 22.

(a) Calculate the balance on trade in goods and services. [2] (b) Calculate the current account balance. [2] (c) What percentage of GDP is the current account balance? [1]

3. In Country C, a firm pays each worker 24,000 C-units a year, and each worker makes 1,200 units.

(a) Calculate unit labour cost before and after output per worker rises 20% with wages unchanged. [2] (b) Explain how a rise in productivity across exporting firms could affect the current account. [2]

4. A Country C product costs 500 C-units. The exchange rate is 1 C-unit = 1.20 foreign units (F) and then falls to 1.00 F. The price elasticity of demand for the product abroad is -1.8.

(a) Calculate the price in F before and after, and the percentage change. [2] (b) Use the elasticity to find the percentage change in quantity demanded. [1] (c) Find the percentage change in revenue received in F. [1] (d) Comment on the result. [1]

5. Country C’s price index rises from 100 to 112. Its main partner’s index rises from 100 to 104. The exchange rate is unchanged.

(a) Calculate by how much Country C’s prices have risen relative to the partner’s. [2] (b) Explain the likely effect on the current account. [3]

6. Country C’s imports of goods have an income elasticity of demand of 2.2. Its exports have an income elasticity of 1.5. Home income rises 3% and partners’ income falls 2%. Use the goods figures from question 2.

(a) Calculate the percentage change in imports and in exports. [2] (b) Calculate the new goods balance. [2] (c) Explain the cause of the change. [2]

7. In Country D the poorest 40% have an income of 120, the middle 40% have 300 and the richest 20% have 280, in billions of D-units. After a year of growth these rise by 3%, 4% and 8%.

(a) Calculate the percentage growth of total income. [2] (b) Calculate the share of total income of the poorest 40% before and after. [2] (c) Explain why growth has not reduced inequality and suggest one policy response. [2]

8. Country D’s real GDP rises 3.5% while emissions per unit of output fall 1.5%.

(a) Calculate the percentage change in total emissions. [2] (b) Explain what this shows about growth and the environment. [2]

9. Country E has potential output of 1,800 and actual real GDP of 1,692.

(a) Work out the size of the gap, in percent of what the economy could produce. [2] (b) Explain two consequences of this gap for unemployment and the budget balance. [4]

10. Country G has a positive output gap, rising inflation and a current account deficit. Its government uses deflationary policy. Analyse how this policy might help some objectives but conflict with others. [8]

11. “A country cannot achieve fast growth, low unemployment, stable prices and a balanced current account at the same time.” Evaluate this statement. [12]

Answers

1. Debits exceed credits [1] on the sum of goods, services, primary and secondary income, so more money flows out than in [1]. [2] Examiner insight: Naming the four parts or the credits and debits idea usually strengthens a definition; the word “negative” alone says little.

2. (a) Goods = 310 - 340 = -30 [1]. Services = 120 - 85 = +35, so trade balance = +5 [1]. [2] (b) Primary = 30 - 41 = -11 and secondary = 15 - 22 = -7 [1]. Balance = -30 + 35 - 11 - 7 = -13, a deficit [1]. [2] (c) -13 / 1,300 × 100 = -1.0% [1]. [1] Examiner insight: Showing each balance separately makes your working easy to follow and check; keep the sign and the unit.

3. (a) Before: 24,000 / 1,200 = 20 [1]. After: output per worker 1,440, so 24,000 / 1,440 = 16.67, a fall of 16.7% [1]. [2] (b) Lower unit costs let firms cut prices or raise quality, so exports become more competitive [1]. Exports rise and imports may fall, so the balance improves [1]. [2] Examiner insight: Linking the lower cost to price, then to volumes, then to the balance tends to gain more credit than saying “productivity improves trade”.

4. (a) Before: 500 × 1.20 = 600 F. After: 500 × 1.00 = 500 F [1]. Change = -16.7% [1]. [2] (b) 1.8 × 16.7 = +30% [1]. [1] (c) Revenue index = (500 / 600) × 1.30 = 1.083, so revenue rises 8.3% [1]. [1] (d) Demand is elastic, so the quantity effect outweighs the price fall and foreign revenue rises [1]. [1] Examiner insight: Comments on revenue are stronger when they name elastic demand and compare the two percentage changes.

5. (a) Relative price = 112 / 104 = 1.0769 [1], so Country C is 7.7% dearer [1]. [2] (b) Exports become dearer abroad and imports look cheaper relative to home goods [1]. Buyers switch, so export volumes fall and import volumes rise [1]. The size depends on elasticity, so the balance is likely to worsen unless the exchange rate falls to offset it [1]. [3] Examiner insight: Stating the exchange rate is held constant, as the question does, shows you understand why the whole price gap passes into competitiveness.

6. (a) Imports: 2.2 × 3 = +6.6% [1]. Exports: 1.5 × -2 = -3.0% [1]. [2] (b) Exports = 310 × 0.97 = 300.7 and imports = 340 × 1.066 = 362.44 [1]. Balance = -61.74, against -30 before [1]. [2] (c) Rising home income pulls in imports [1], while weaker partner income cuts demand for exports [1]. [2] Examiner insight: Applying the percentage change to the right base figure matters here; calculate imports and exports separately.

7. (a) New incomes: 123.6, 312.0 and 302.4, total 738.0 [1]. Growth = 38 / 700 = 5.4% [1]. [2] (b) Before: 120 / 700 = 17.1%. After: 123.6 / 738 = 16.7% [1] [1]. [2] (c) The richest 20% gained 8% against 3% for the poorest 40%, so average income rose but the distribution widened [1]. Policy: progressive taxes and transfers, or education and training for low earners [1]. [2] Examiner insight: Quoting the two shares and the two growth rates makes the evidence specific; a general claim that growth helps everyone tends to gain little.

8. (a) 1.035 × 0.985 = 1.0195 [1], a rise of about 1.9% [1]. [2] (b) Cleaner production reduced emissions per unit [1], but the rise in output outweighed it, so growth still raised total emissions [1]. [2] Examiner insight: Multiplying the two index values is sound; subtracting 1.5 from 3.5 gives a different answer.

9. (a) (1,692 - 1,800) / 1,800 [1] = -6.0% [1]. [2] (b) The negative gap means spare capacity, so firms need fewer workers and cyclical unemployment rises [1] [1]. Tax revenue falls while spending on benefits rises, so the budget deficit widens [1] [1]. [4] Examiner insight: Each consequence needs a reason, not only the outcome; a bare list of “unemployment and deficit” tends to earn less.

10. Positive gap means demand is above capacity, which pulls up prices and draws in imports [1]. Deflationary policy reduces AD, shifting it left [1]. Inflationary pressure eases as demand falls toward capacity [1]. Imports fall with spending, so the current account deficit narrows, which is a case where two objectives are helped together [1]. Real GDP growth slows or may fall [1], and unemployment may rise as firms cut output [1]. Lower incomes also cut tax revenue, which weakens the budget balance [1]. Judgement: the conflict is limited if the gap is small and the economy returns to potential, and in the long run supply-side policy can raise capacity without more inflation [1]. [8] Examiner insight: Separating the objectives helped from the objectives harmed gives a clear structure, and a final judgement tied to the size of the gap tends to gain more than a summary.

11. Growth and inflation: demand-led growth near capacity pulls up prices as AD moves along SRAS [1]. Growth also pulls in imports, so the current account worsens [1] [1]. Low unemployment needs growth above productivity growth, which risks wage pressure and inflation [1]. Policies such as higher interest rates restore price stability but can slow growth and raise unemployment [1]. A cost-push shock shifts SRAS left, raising prices while cutting output, so conflicts arise even without strong demand [1]. Evaluation: the statement is too strong in the long run, since supply-side policies shift LRAS right and allow growth with low unemployment and stable prices [1] [1]. In the short run it holds more where spare capacity is small [1]. The size of the clash depends on import income elasticity and on the exchange rate [1]. Policy instruments can target separate aims, though conflicts remain [1]. Conclusion: it is true as a short-run tendency, not as a permanent law [1]. [12] Examiner insight: Strong answers build chains of reasoning and then qualify them with timescale, spare capacity or the cause of the shock, rather than agreeing or disagreeing in one line.

Where marks are usually lost

• Calling a goods deficit the current account deficit.
• Losing the sign on a balance, or giving a deficit without a unit.
• Using the wrong base for a percentage change.
• Adding percentage changes instead of multiplying indices.
• Stating that depreciation improves the balance without an elasticity condition.
• Describing a conflict without an AD/AS step.
• Treating a short-run trade-off as permanent.
• Ending without a judgement.

Next steps

• Return to the revision notes and the study guide.
• Check the course hub and tick off the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, first teaching September 2020, published by OxfordAQA: sections 3.2.3.4 and 3.2.3.5.