Which is part of trade in services?

spending by foreign tourists in the country. Tourism is a service sold to foreigners. Money sent home is secondary income.

A current account deficit means that

more money flows out of the country than into it on the current account. Do not confuse it with a budget deficit, which is about government spending and tax.

Exports of goods are $40 billion and imports of goods are $55 billion. What is the balance of trade in goods?

a deficit of $15 billion. 40 − 55 = −$15 billion.

Which is most likely to cause a current account deficit?

a rise in incomes at home, leading to more spending on imports. Some of the extra income is spent on foreign goods.

Profits sent home by a company's factories abroad are counted in

primary income. Primary income is earnings from work and investments abroad.

The current account of the balance of payments

In plain words

The balance of payments is a country's record of all the money that flows in from other countries and out to them. The part that covers everyday trade and income is the current account.

If more money goes out than comes in, the current account is in deficit.

5 things to know

The current account has four parts: trade in goods (also called visibles), trade in services (invisibles), primary income (wages, interest, profits and dividends earned from abroad) and secondary income (transfers such as aid and money sent home by workers abroad).
Balance = money flowing in − money flowing out. A current account deficit means more flows out than in. A surplus means more flows in.
Causes of a deficit: high incomes at home (so more imports are bought), a high exchange rate, inflation higher than in other countries, and goods of lower quality than rivals'.
Consequences of a deficit: money leaks out of the economy, so total demand, output and jobs are lower, and the currency tends to fall in value.
Policies to reduce a deficit: a lower exchange rate, tariffs and quotas, higher taxes or interest rates to cut spending on imports, and supply-side measures to make home goods more competitive.

Worked example

A country exports goods worth $50 billion and imports goods worth $62 billion. It exports services worth $30 billion and imports services worth $22 billion. Net primary income is +$3 billion and net secondary income is −$4 billion. Find the current account balance.

Trade in goods = 50 − 62 = −$12 billion. Trade in services = 30 − 22 = +$8 billion.
Add the four parts: −12 + 8 + 3 − 4.
Current account balance = −$5 billion: a deficit of $5 billion.

Tips and tricks

Goods are things you can touch (cars, oil). Services are not (tourism, banking, shipping). A foreign tourist's spending in your country counts as an export of services.
A deficit is not always a problem. It matters if it is large, lasts for years, and is paid for by borrowing.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

The current account of the balance of payments: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Which is part of trade in services?
- exports of cars
- imports of oil
- spending by foreign tourists in the country (the answer)
- money sent home by workers abroad
Tourism is a service sold to foreigners. Money sent home is secondary income.
A current account deficit means that
- more money flows out of the country than into it on the current account (the answer)
- more money flows in than out
- the government spends more than it raises in tax
- exports are greater than imports
Do not confuse it with a budget deficit, which is about government spending and tax.
Exports of goods are $40 billion and imports of goods are $55 billion. What is the balance of trade in goods?
- a surplus of $15 billion
- a deficit of $15 billion (the answer)
- a surplus of $95 billion
- a deficit of $95 billion
40 − 55 = −$15 billion.
Which is most likely to cause a current account deficit?
- a fall in the exchange rate
- a rise in incomes at home, leading to more spending on imports (the answer)
- an improvement in the quality of home-produced goods
- lower inflation than in other countries
Some of the extra income is spent on foreign goods.
Profits sent home by a company's factories abroad are counted in
- trade in goods
- trade in services
- primary income (the answer)
- secondary income
Primary income is earnings from work and investments abroad.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 8 marks. Write your answers on paper, then check them.

The current account of the balance of payments

Edexcel International GCSE Economics 4EC1 · 8 marks · papermunch.org

Name ______________________________ Date ______________

State the four components of the current account of the balance of payments.[2]
Show answerHide answer
Trade in goods, trade in services, primary income and secondary income.
I got this one
A country's exports of goods are $90 billion, imports of goods $75 billion, exports of services $20 billion and imports of services $40 billion. Calculate the balance of trade in goods and services.[3]
Show answerHide answer
Goods: 90 − 75 = +$15 billion. Services: 20 − 40 = −$20 billion. Overall: −$5 billion, a deficit.
I got this one
Explain how a fall in a country's exchange rate could reduce a current account deficit.[3]
Show answerHide answer
Its exports become cheaper abroad, so more are sold. Imports become dearer at home, so fewer are bought. More money flows in and less flows out.
I got this one

Answers: The current account of the balance of payments

1. Trade in goods, trade in services, primary income and secondary income.
2. Goods: 90 − 75 = +$15 billion. Services: 20 − 40 = −$20 billion. Overall: −$5 billion, a deficit.
3. Its exports become cheaper abroad, so more are sold. Imports become dearer at home, so fewer are bought. More money flows in and less flows out.