Balance of Payments

    OCR
    GCSE

    The Balance of Payments (BoP) records all financial transactions between economic agents of one country and the rest of the world over a specific period. It is a fundamental macroeconomic indicator comprising the Current Account, Capital Account, and Financial Account. Analysis focuses on the causes of disequilibria (surpluses and deficits), the sustainability of such imbalances, and the mechanisms—automatic or policy-induced—required for correction. Mastery requires understanding the accounting identity where the sum of accounts equals zero, alongside the economic implications of net trade performance on Aggregate Demand, exchange rates, and domestic standards of living.

    5
    Objectives
    4
    Exam Tips
    4
    Pitfalls
    3
    Key Terms
    4
    Mark Points

    Learning Objectives

    What you need to know and understand

    • Trade in Goods (Visibles)
    • Trade in Services (Invisibles)
    • Primary Income (Investment income, wages)
    • Secondary Income (Transfers, aid)
    • Current Account Deficit vs. Surplus definitions

    Marking Points

    Key points examiners look for in your answers

    • Award marks for precise definitions of the Current Account components (e.g., distinguishing between Primary and Secondary Income)
    • Credit accurate calculations of the balance of trade or current account balance using provided data sets
    • Candidates must analyse the consequences of a deficit, linking it explicitly to aggregate demand, employment levels, or currency depreciation
    • Reward evaluation that weighs the severity of a deficit (e.g., short-term vs. structural) or the effectiveness of supply-side policies to correct it

    Examiner Tips

    Expert advice for maximising your marks

    • 💡When provided with a data table, explicitly quote the figures to support your analysis (AO2 application)
    • 💡Use the 'Chain of Reasoning' technique: Action -> Reaction -> Consequence -> Macroeconomic Impact
    • 💡In 12-mark evaluation questions, ensure the judgment is supported by the weight of prior arguments, not just a summary
    • 💡Memorise the four components of the Current Account to ensure full marks on definition questions

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Conflating 'Government Budget Deficit' (fiscal) with 'Balance of Payments Deficit' (trade)
    • Confusing the direction of money flows (e.g., stating imports bring money into the economy)
    • Failing to distinguish between 'volume' of trade and 'value' of trade when discussing exchange rate effects
    • Omitting Primary and Secondary Income when defining the Current Account, focusing solely on exports/imports

    Study Guide Available

    Comprehensive revision notes & examples

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    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

    Calculate
    Explain
    Analyse
    Evaluate
    Discuss
    State

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