Calculation of deficits and surpluses on the current account of the balance of payments and its component sections

International Trade & Globalisation – Current Account of the Balance of Payments (Cambridge IGCSE 0455)

1. What is the Current Account?

The current account records every transaction in which a country exports or imports:

• goods (merchandise)
• services
• primary income (factor income)
• secondary (current) transfers

These flows are measured over a specific period (usually one year) and form one of the three main sections of the Balance of Payments – the other two being the capital account and the financial account.

2. Four Components of the Current Account (exact syllabus wording)

3. Sign Convention Used in Exams

4. Exam‑ready Formula for the Current‑Account Balance

5. Worked Example (All figures in £ million)

Step 1 – Total credits

\[

\text{Total Credits}=120+45+20+10=195

\]

Step 2 – Total debits

\[

\text{Total Debits}=150+30+25+5=210

\]

Step 3 – Current‑account balance

\[

\text{CAB}=195-210=-15\;\text{million £}

\]

Result: the economy runs a current‑account deficit of £15 million.

6. Causes of a Surplus and a Deficit (syllabus terminology)

Causes that push the balance towards a surplus

• Higher export volumes (or lower import volumes)
• Improvement in the terms of trade – export prices rise relative to import prices
• Depreciation of the domestic currency – makes exports cheaper and imports more expensive
• Large inflows of primary income (e.g., dividends, interest, remittances)
• Net inflow of secondary transfers (foreign aid, remittances received)
• Expansionary fiscal/monetary policy that reduces domestic demand for imports (e.g., high interest rates that curb consumption)

Causes that push the balance towards a deficit

• Higher import volumes (or lower export volumes)
• Deterioration in the terms of trade – export prices fall relative to import prices
• Appreciation of the domestic currency – makes imports cheaper and exports less competitive
• Large outward primary‑income payments (interest, dividends on foreign assets)
• Net outflow of secondary transfers (foreign aid given, remittances sent abroad)
• Expansionary fiscal policy or low interest rates that boost domestic demand for imports

7. Implications of a Sustained Surplus or Deficit

Implications of a surplus

• The country is a net lender to the rest of the world.
• May lead to an accumulation of foreign exchange reserves.
• Pressure for the domestic currency to appreciate, which can reduce export competitiveness (the “Dutch disease” effect).
• Governments may use surplus funds to reduce public debt or increase investment.

Implications of a deficit

• The country is a net borrower from the rest of the world.
• Financing must come from the capital/financial account or from reserve draw‑downs.
• Persistent deficits can increase external debt and raise vulnerability to sudden stops in capital flows.
• Policy responses may include tightening fiscal policy, raising interest rates, or allowing the currency to depreciate.

8. Link to Globalisation

• Trade liberalisation – reduces tariffs, increasing both exports and imports; the net effect on the goods balance depends on competitiveness.
• Digitalisation & off‑shoring – expands the services component (e.g., IT, finance, consulting).
• Greater labour mobility – boosts remittance flows, a major part of secondary transfers.
• International investment portfolios – affect primary‑income receipts and payments (dividends, interest).
• Global supply‑chain integration – can improve terms of trade for some countries while increasing import dependence for others.

9. Quick‑Check Checklist for the Examination (Section 6.4.1‑6.4.3)

• Identify the four components exactly as the syllabus states.
• State the sign convention: credits = +, debits = – (in a bolded box).
• Write the exam‑ready formula for the current‑account balance using the syllabus symbols.
• Calculate a surplus or deficit from a data set, showing:

  • total credits, total debits, and the net balance;
  • the final answer expressed as “current‑account surplus” or “current‑account deficit”.

• Explain at least three causes of a surplus and three causes of a deficit, using the exact syllabus terminology.
• Discuss the macro‑economic implications of a sustained surplus and of a sustained deficit.
• Link any change in the current account to globalisation trends (trade liberalisation, digital services, remittances, investment flows).