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6.3.2 calculation of current account balances

6.3.2 calculation of current account balances

The current account balance

Definition

Balance of trade in goods and services: the combined balance on trade in goods and trade in services, often called net exports.

Current account balance (CAB): the sum of the balances on trade in goods, trade in services, primary income and secondary income over a period.

The four balances

Balance of trade in goods = exports of goods − imports of goods

Balance of trade in services = exports of services − imports of services

Balance of trade in goods and services = balance on goods + balance on services

Current account balance = balance on goods and services + net primary income + net secondary income

Key Idea
  • A positive balance is a surplus and a negative balance is a deficit.
  • The overall sign comes only from the full total, since components can offset one another.

Worked example

  1. An economy reports four components in a year, all in £bn, on a GDP of £1,200bn.
  2. Trade in goods: exports £300bn and imports £380bn.
  3. Trade in services: exports £150bn and imports £90bn.
  4. Net primary income of +£12bn and net secondary income of −£7bn.
Example
  • Work through the balances in order, then size the result as a % of the £1,200bn GDP.
goods=300−380=−80services=150−90=+60 \text{goods} = 300 - 380 = -80 \qquad \text{services} = 150 - 90 = +60 goods=300−380=−80services=150−90=+60 goods and services=−80+60=−20 \text{goods and services} = -80 + 60 = -20 goods and services=−80+60=−20 CAB=−20+12−7=−15 \text{CAB} = -20 + 12 - 7 = -15 CAB=−20+12−7=−15 −151200×100=−1.25% \frac{-15}{1200} \times 100 = -1.25\% 1200−15​×100=−1.25%
  • The economy runs a current account deficit of £15bn, about 1.25% of GDP, with the services surplus partly offsetting the goods deficit.

Reading the result

  1. A surplus on services partly offsets the deficit on goods in this example.
  2. Positive net primary income narrows the deficit, while negative net secondary income widens it.
  3. Changing any single component by £1bn changes the CAB by £1bn in the same direction.
  4. Whether a £15bn deficit matters depends on its size relative to GDP and on how easily it is financed.
Exam technique
  • Work out each balance in order: goods, then services, then the income flows.
  • State whether the final CAB is a surplus or a deficit and show your working.
  • Express the CAB as a % of GDP to judge how significant it is.
Common Mistake
  • Do not leave out primary or secondary income when finding the CAB.
  • Watch the signs, because a negative income flow reduces the total.
Self review
  • How do you calculate the balance of trade in goods?
  • How do you calculate the balance of trade in goods and services?
  • What must be added to the trade balance to reach the CAB?
  • If goods are −£80bn, services +£60bn, primary +£12bn and secondary −£7bn, what is the CAB?
  • Express a £15bn deficit as a % of £1,200bn GDP.
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Flow diagram showing how goods, services, primary income and secondary income combine to form the current account balance

The current account balance, or CAB, measures the total balance on trade in goods, trade in services, primary income and secondary income over a period.

A positive result is a current account surplus, while a negative result is a current account deficit. First calculate the balance on goods and services, then add net primary income and net secondary income:

CAB=balance on goods and services+net primary income+net secondary income \text{CAB} = \text{balance on goods and services} + \text{net primary income} + \text{net secondary income} CAB=balance on goods and services+net primary income+net secondary income

All components must use the same units and cover the same time period. A component with a negative value reduces the final CAB.

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How is the balance of trade in goods calculated?

6.3.2 calculation of current account balances Revision Guide

  1. Intl A Level
  2. /Economics
  3. /6.3.2 calculation of current account balances

Revision notes for CIE Intl A Level Economics 6.3.2 calculation of current account balances: explanations and worked examples.