Calculate and interpret the current account balance
Add current-account components and assess possible causes, consequences and policy responses to imbalances.
Cambridge IGCSE Economics 0455 / IGCSE (9–1) Economics 0987, 2027–2029 Version 1. Apply each model to the stated evidence and qualify conclusions where effects depend on context. Practice is original and self-checked; it is not a Cambridge paper, mark scheme or official grade.
Before you begin
- No prior economics study is assumed. Read the scenario for the decision-maker, the market or economy involved, the time period and the evidence supplied.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A current-account surplus means…
What you will learn
- Identify and calculate current-account components
- Explain deficit and surplus causes
- Assess effects and stability policies
The current account records cross-border flows
The current account includes trade in goods, trade in services, primary income and secondary income. A deficit occurs when total debits exceed credits; a surplus occurs when credits exceed debits over the period.
Calculate each component with consistent signs and units before summing. A trade deficit is not automatically the same as a current-account deficit because income and transfers also matter.
An imbalance has causes, effects and possible responses
Causes can include changes in competitiveness, domestic income and import demand, exchange rates, productivity, income flows and economic structure. Consequences can affect GDP, employment, inflation and exchange rates.
Policies to promote balance-of-payments stability include demand, supply-side, exchange-rate and trade measures. Evaluate effects and time lags; reducing imports may improve the balance but can also weaken choice, output or jobs.
Pause and explain
Why can a current-account deficit affect employment?
Worked example
A country records goods −$40m, services +$25m, primary income +$8m and secondary income −$3m. Calculate the current-account balance.
Show the worked solution
- Add all four signed components.
- −40 + 25 + 8 − 3 = −10.
- A negative total is a deficit.
Answer The current account has a $10 million deficit for the period.
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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.
Current-account components are goods +$12m, services −$5m, primary income −$4m and secondary income +$1m. Calculate the balance.
Give me a hint
Add each component with its sign.
Compare my reasoning
- 12 − 5 − 4 + 1 = 4.
- The result is positive.
- State a $4m surplus.
The current account has a $4 million surplus.
Look for these in your work
- Signs preserved
- Sum correct
- Balance labelled
A boom raises household incomes and imports, while exports stay unchanged. Explain one possible effect on the current account and one caveat.
Give me a hint
Consider the import component and the starting balance.
Compare my reasoning
- Higher income can raise demand for imported goods and services.
- The current-account balance may worsen.
- The size depends on import responsiveness and other account components.
Higher income may increase imports and reduce the current-account balance, other things equal. The final result also depends on services, income and transfers and on the size of the response.
Look for these in your work
- Import mechanism stated
- Likely direction stated
- Other components considered
A government considers raising interest rates to reduce a current-account deficit. Explain a possible channel and one conflict with another macroeconomic aim.
Give me a hint
Consider demand and the currency, then output or employment.
Compare my reasoning
- Higher rates may reduce domestic borrowing and import demand.
- They may attract capital and affect the exchange rate.
- Lower spending or stronger currency can weaken output or export competitiveness.
Higher rates may restrain spending and imports and may affect currency flows. They can also reduce investment and employment or strengthen the currency and weaken export competitiveness, so the net effect is uncertain.
Look for these in your work
- Policy channel explained
- External effect considered
- Aim conflict identified
Common mistakes
- Using only trade in goods to infer the full current account
- Dropping negative signs when adding components
- Assuming a deficit always signals an economic crisis
What can you explain now?
What must be included when calculating the current account?
Compare with the explanation
Goods, services, primary income and secondary income
The aggregate includes all four components.
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Make it stick
What must be included when calculating the current account?
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.