The balance of payments is a record of all the money flowing into and out of a country from its dealings with the rest of the world over a period, usually a year.
Why this matters It shows whether a country is earning enough from abroad to pay for what it buys from abroad, a bit like a household checking whether its income covers its spending.
The current account
At IGCSE the main focus is the current account, which records trade in goods and services plus some income flows. In simple outline it includes:
- Exports of goods and services (money coming in, a credit);
- Imports of goods and services (money going out, a debit);
- some flows of income and transfers between countries.
The trade balance is exports minus imports. If exports of goods and services exceed imports, there is a surplus; if imports exceed exports, there is a deficit.
Surpluses and deficits
| Situation | Meaning |
|---|---|
| Current account surplus | The country earns more from abroad than it spends abroad. |
| Current account deficit | The country spends more abroad than it earns from abroad. |
What a deficit means
A deficit is not automatically "bad".
- It may mean consumers enjoy plenty of affordable imports.
- A country may import machinery now to build industries that export later.
- But a large, lasting deficit can mean a country is living beyond its means and building up debts to other countries.
Common exam mistake: assuming a current account deficit is always bad and a surplus is always good. A deficit funded by importing machinery to build future export industries can be healthy; a surplus can also reflect weak domestic demand. Always judge in context rather than assuming automatically.
Correcting a deficit
A government worried about a persistent deficit might try to:
- encourage exports, for example by helping firms compete;
- reduce imports through tariffs or quotas (though these risk retaliation);
- allow the currency to fall, making exports cheaper and imports dearer.
Exam technique: when discussing ways to correct a deficit, mention the RISKS of each method too (tariffs can trigger retaliation, a weaker currency raises import costs) - examiners reward evaluation, not just a list of methods.
Economists disagree about how much a deficit matters; context, size and how it is financed all count.