Current account of the balance of payments
Current account of the balance of payments: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 6.3; AS Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which items are included in the current account?
What you will learn
- Identify the four current-account components
- Calculate goods, services and total current-account balances
- Explain causes of surpluses and deficits
- Analyse domestic and external consequences
Core model and terms
The current account records trade in goods and services, primary income and secondary income. A surplus means net receipts exceed payments; a deficit means payments exceed receipts over the period. Calculate each balance with a consistent sign, then combine them to obtain the current-account balance.
Apply and evaluate
An imbalance may reflect saving and investment, competitiveness, domestic demand, exchange rates or income flows. A deficit can finance investment or increase external liabilities, while a surplus can indicate export strength but may also reflect weak domestic spending. Consequences depend on persistence, financing and the wider economy.
Pause and explain
Which statement best applies current account of the balance of payments?
Worked example
Goods exports are $90bn and imports $110bn; services exports are $45bn and imports $35bn; net primary income is −$4bn and net secondary income +$2bn. Calculate the current-account balance.
Show the worked solution
- Goods = 90 − 110 = −$20bn; services = 45 − 35 = +$10bn
- Add primary −4 and secondary +2
- CAB = −$12bn, a deficit
Answer Goods = 90 − 110 = −$20bn; services = 45 − 35 = +$10bn → Add primary −4 and secondary +2 → CAB = −$12bn, a deficit
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Goods exports are $90bn and imports $110bn; services exports are $45bn and imports $35bn; net primary income is −$4bn and net secondary income +$2bn. Calculate the current-account balance.
Give me a hint
Calculate each net balance, then add the four components.
Compare my reasoning
- Goods = 90 − 110 = −$20bn; services = 45 − 35 = +$10bn
- Add primary −4 and secondary +2
- CAB = −$12bn, a deficit
Goods = 90 − 110 = −$20bn; services = 45 − 35 = +$10bn Add primary −4 and secondary +2 CAB = −$12bn, a deficit
Look for these in your work
- Goods = 90 − 110 = −$20bn; services = 45 − 35 = +$10bn
- Add primary −4 and secondary +2
- CAB = −$12bn, a deficit
A country imports more goods than it exports but has a services surplus. Why is the goods balance alone insufficient to identify the current-account balance?
Give me a hint
Include income transfers and services, not only merchandise trade.
Compare my reasoning
- Goods are one component
- Services, primary income and secondary income also count
- The full sum determines the current-account balance
Goods are one component Services, primary income and secondary income also count The full sum determines the current-account balance
Look for these in your work
- Goods are one component
- Services, primary income and secondary income also count
- The full sum determines the current-account balance
A persistent deficit is financed by borrowing from abroad. Explain one benefit and one risk.
Give me a hint
Consider use of funds and future obligations.
Compare my reasoning
- Borrowing can fund investment or spending now
- External liabilities accumulate
- Future interest payments or refinancing can become a constraint
Borrowing can fund investment or spending now External liabilities accumulate Future interest payments or refinancing can become a constraint
Look for these in your work
- Borrowing can fund investment or spending now
- External liabilities accumulate
- Future interest payments or refinancing can become a constraint
A country’s surplus grows during a recession as imports fall sharply. Explain why the surplus alone does not prove strong export competitiveness.
Give me a hint
Separate export performance from domestic import demand.
Compare my reasoning
- Exports may be unchanged or weak
- Recession reduces household and firm spending on imports
- The surplus can widen because imports fell, not because exports became more competitive
Exports may be unchanged or weak Recession reduces household and firm spending on imports The surplus can widen because imports fell, not because exports became more competitive
Look for these in your work
- Exports may be unchanged or weak
- Recession reduces household and firm spending on imports
- The surplus can widen because imports fell, not because exports became more competitive
Common mistakes
- Calling a deficit automatically bad or calculating the account from goods trade alone.
What can you explain now?
Which items are included in the current account?
Compare with the explanation
Goods, services, primary income and secondary income
The account combines trade flows with income and current transfers.
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Make it stick
Before moving on, explain the central idea in current account of the balance of payments and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.