Policies to correct imbalances in the current account of the balance of payments
Policies to correct imbalances in the current account of the balance of payments: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
Section 6.5 · Policies to correct imbalances in the current account of the balance of payments
9708 section 6.5; 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
What is a sound first step before choosing a policy to correct a current-account imbalance?
What you will learn
- Explain stability of the current account as a policy objective
- Evaluate fiscal, monetary, supply-side and protectionist policies
Core model and terms
Current-account stability does not require a zero balance every period; it concerns whether external flows are sustainable. A persistent imbalance may reflect domestic demand, competitiveness, income flows or structural conditions, so diagnose the cause before choosing a policy.
Apply and evaluate
Fiscal or monetary tightening may reduce import demand but can also weaken output and employment. Supply-side measures may improve productivity and export capacity over time; protection can reduce selected imports but risks higher costs and retaliation. Evaluate the time horizon, distribution and likely responses rather than promising a guaranteed correction.
Pause and explain
Which statement best applies policies to correct imbalances in the current account of the balance of payments?
Worked example
A country’s deficit is driven mainly by strong domestic spending on imports. Explain a possible policy direction and its cost.
Show the worked solution
- A tighter fiscal or monetary stance may reduce domestic spending
- Lower income can reduce import demand
- Output and employment may also weaken
Answer A tighter fiscal or monetary stance may reduce domestic spending → Lower income can reduce import demand → Output and employment may also weaken
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
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.
A country’s deficit is driven mainly by strong domestic spending on imports. Explain a possible policy direction and its cost.
Give me a hint
Link the diagnosis to aggregate demand and imports.
Compare my reasoning
- A tighter fiscal or monetary stance may reduce domestic spending
- Lower income can reduce import demand
- Output and employment may also weaken
A tighter fiscal or monetary stance may reduce domestic spending Lower income can reduce import demand Output and employment may also weaken
Look for these in your work
- A tighter fiscal or monetary stance may reduce domestic spending
- Lower income can reduce import demand
- Output and employment may also weaken
Why might worker training improve the current account only after a delay?
Give me a hint
Connect skills to productivity, export supply and time to adjust.
Compare my reasoning
- Training builds skills gradually
- Productivity and export quality may improve later
- Firms need time to expand and reach foreign buyers
Training builds skills gradually Productivity and export quality may improve later Firms need time to expand and reach foreign buyers
Look for these in your work
- Training builds skills gradually
- Productivity and export quality may improve later
- Firms need time to expand and reach foreign buyers
A tariff reduces imports of one good but raises costs for domestic firms using it as an input. Explain the possible conflict.
Give me a hint
Consider consumer/import protection and downstream production.
Compare my reasoning
- The tariff may reduce the targeted imports
- Input costs for domestic producers can rise
- Their prices or export competitiveness may worsen
The tariff may reduce the targeted imports Input costs for domestic producers can rise Their prices or export competitiveness may worsen
Look for these in your work
- The tariff may reduce the targeted imports
- Input costs for domestic producers can rise
- Their prices or export competitiveness may worsen
Why should policymakers distinguish a temporary deficit from a persistent, difficult-to-finance deficit?
Give me a hint
Consider financing, duration and the response needed.
Compare my reasoning
- A short-term imbalance may reflect temporary shocks
- A persistent deficit can accumulate external liabilities
- Policy urgency depends on financing sustainability and its causes
A short-term imbalance may reflect temporary shocks A persistent deficit can accumulate external liabilities Policy urgency depends on financing sustainability and its causes
Look for these in your work
- A short-term imbalance may reflect temporary shocks
- A persistent deficit can accumulate external liabilities
- Policy urgency depends on financing sustainability and its causes
Common mistakes
- Treating a zero current-account balance as the only objective or promising that one policy will correct every cause.
What can you explain now?
What is a sound first step before choosing a policy to correct a current-account imbalance?
Compare with the explanation
Identify the cause and whether the imbalance is sustainable
Different causes call for different responses and have different costs.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Before moving on, explain the central idea in policies to correct imbalances in the 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.