Current account of the balance of payments
- Cambridge IGCSE
- Economics
Speaker notes: Syllabus ref: 6.4
Learning Objectives
- Understand the structure of the current account
- Identify causes of current account deficits and surpluses
- Analyse consequences of current account imbalances
- Evaluate policies to achieve balance of payments stability
Speaker notes: By the end of the lesson, students should be able to meet these objectives.
Starter: Discussion
- Imagine your country imports more than it exports. What might be the effects?
Speaker notes: Encourage students to think about the impacts on the economy and discuss their ideas.
Structure of the Current Account
- Exports of goods and services
- Imports of goods and services
- Income from abroad (e.g., investments)
- Payments to abroad (e.g., interest)
Speaker notes: Explain that the current account records these transactions. Ask students to give examples of each.
Current Account Balance
- Current account balance = Exports - Imports + Net income from abroad
- Surplus: Exports and income > Imports and payments
- Deficit: Imports and payments > Exports and income
Speaker notes: Emphasise the formula and the conditions for surplus and deficit.
Causes of Current Account Deficit
- Low competitiveness of domestic industries
- High domestic demand leading to more imports
- Appreciation of the exchange rate
- High income payments to abroad
Speaker notes: Discuss each cause and how it affects the current account.
Causes of Current Account Surplus
- High competitiveness of domestic industries
- Low domestic demand leading to fewer imports
- Depreciation of the exchange rate
- Low income payments to abroad
Diagram explained
The x-axis shows quantity of the currency and the y-axis shows the exchange rate. Demand for the currency shifts right, causing the exchange rate to rise. This makes imports cheaper and exports more expensive, potentially reducing the current account balance.
- Demand for the currency increases
- The exchange rate appreciates
- Imports become cheaper, exports more expensive
Speaker notes: Discuss each cause and how it affects the current account.
Consequences of Deficit
- Reduces net exports, potentially lowering economic growth
- May lead to depreciation of the exchange rate
- Can result in a decrease in foreign exchange reserves
- May require borrowing from abroad, increasing national debt
Speaker notes: Explain each consequence and its potential impact on the economy.
Consequences of Surplus
- Increases net exports, potentially raising economic growth
- May lead to appreciation of the exchange rate
- Can result in an increase in foreign exchange reserves
- May lead to trade tensions with other countries
Speaker notes: Explain each consequence and its potential impact on the economy.
Policies to Achieve Balance
- Improving competitiveness through innovation and investment
- Managing domestic demand to reduce imports
- Exchange rate management to maintain competitiveness
- Encouraging foreign direct investment to boost exports
Speaker notes: Discuss each policy and how it can help achieve balance of payments stability.
Worked Example: Calculating Current Account Balance
- Exports: $500 billion
- Imports: $600 billion
- Income from abroad: $50 billion
- Payments to abroad: $30 billion
- Current account balance = $500 - $600 + $50 - $30 = -$80 billion (deficit)
Speaker notes: Walk through the calculation step by step, ensuring students understand each part.
Common Mistakes and Exam Tips
- Mistake: Forgetting to include income and payments from abroad in the current account balance
- Tip: Always use the formula: Exports - Imports + Net income from abroad
- Mistake: Confusing current account with capital account
- Tip: Remember, the current account records trade in goods, services, and income, while the capital account records investment flows
Speaker notes: Highlight common mistakes and provide tips to avoid them in exams.
Key Terms
- Current account: Records trade in goods, services, and income
- Deficit: When imports and payments exceed exports and income
- Surplus: When exports and income exceed imports and payments
- Exchange rate: Price of one currency in terms of another
- Foreign exchange reserves: Assets held by a central bank in foreign currencies
Speaker notes: Ensure students understand these key terms and can use them in context.
Plenary: Quick Check
- What are the main components of the current account?
- What causes a current account deficit?
- What are the consequences of a current account surplus?
- What policies can a government use to achieve balance of payments stability?
Speaker notes: Ask students to answer these questions to check their understanding.
Plenary: Summary
- The current account records trade in goods, services, and income, and can be in surplus or deficit.
Speaker notes: Summarise the key points of the lesson.