Cambridge IGCSE Economics 0455
Syllabus points
- Describe the structure of the current account.
- Explain the causes and consequences of a current account deficit and surplus.
- Explain policies to reduce a deficit.
What is the current account?
The balance of payments records all economic transactions between a country and the rest of the world. The current account is its main part, recording trade in goods and services (plus income and transfers).
- Trade in goods — exports minus imports of physical products.
- Trade in services — exports minus imports of services (tourism, banking).
- Plus income and current transfers.
Key definitions
| Term | Definition |
|---|---|
| Current account | The record of a country's trade in goods, services, income and transfers. |
| Current account deficit | When the value of imports exceeds the value of exports. |
| Current account surplus | When the value of exports exceeds the value of imports. |
Deficit and surplus
- A deficit means a country buys more from abroad than it sells — money flows out. Causes include a strong currency, high domestic demand for imports, or uncompetitive exports.
- A surplus means exports exceed imports — money flows in.
Imports > exports → current account deficit. Exports > imports → surplus.
Consequences of a deficit
- Money flows out of the country.
- May need to borrow or run down reserves to pay for imports.
- Can signal uncompetitive industries.
- But a small deficit is not always bad — it may reflect strong growth and investment.
Policies to reduce a deficit
- Depreciation of the currency — makes exports cheaper and imports dearer.
- Protectionism — tariffs or quotas to cut imports (risking retaliation).
- Reducing demand — contractionary policy to cut spending on imports.
- Supply-side policies — improving competitiveness and productivity in the long run.
Worked example
A country runs a large current account deficit because its exports are uncompetitive and consumers buy many imports. Its currency depreciates, making exports cheaper abroad and imports dearer, so exports rise and imports fall, helping to close the deficit — though import prices and inflation may rise in the short term.
Common exam mistakes
- Confusing a deficit (imports > exports) with a surplus.
- Assuming a deficit is always harmful — context matters.
Exam technique
Explain the cause of the deficit, then match a policy (depreciation, demand reduction, supply-side) and evaluate its trade-offs (inflation, retaliation, time).
Quick revision
- Current account = trade in goods and services (+ income, transfers).
- Deficit: imports > exports; surplus: exports > imports.
- Fixes: depreciation, protection, lower demand, supply-side competitiveness.