Practise analysing why global trade imbalances matter, using current-account data to link external balances to macroeconomic effects.
In 2019 the current account deficit on the balance of payments in Turkey was US$47.4 billion and in Argentina it was US$31.3 billion.
Evaluate the disadvantages of a current account deficit to a developing country of your choice.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application, Analysis (12 marks) - indicative content
- Understanding of current account deficit
- All current account deficits need to be financed and if they are substantial this can become a significant problem;
it may cause reduction in reserves and need to borrow from IMF
- The lack of international competitiveness may indicate lower economic growth and increasing unemployment
- Trade in goods deficit might be quite difficult to finance;
it may require higher interest rates or sale of assets
- Might cause a depreciation in the country's exchange rate, with possible
inflationary pressures and increased debt burden if held in foreign currency
- Net leakage from circular flow of income could cause a fall in AD, leading to fall in output, employment and income via the multiplier effect
- Deficit may imply more reliance on consumer spending and becoming highly uncompetitive: structural weakness and uncompetitive manufacturing sector
- Danger of increased use of protectionist policies by countries with trade
deficits, which could distort comparative advantage
- The financial crisis led to a downturn in economies of deficit countries - foreign financing used to pay for deficits fell due to lack of confidence
N.B. Award maximum of Level 3 (9 marks) if a candidate does not refer to a developing country in their answer
Level
Mark Descriptor
0 No rewardable material.
Level 1
1-3
Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.
Use of generic material or irrelevant information or inappropriate examples. Descriptive approach which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
- Current account deficit may be financed by the inflows in the capital and financial account of the balance of payments
- The deficit may be a relatively small percentage of GDP and therefore is likely to be manageable
- May be desirable if trade imbalances are caused by the imports of capital goods which would increase the country's productive capacity/potential output in the long run
- Exchange rate might change to bring about a correction of the balance of payment deficit on the current account
- Might only be a short-term problem;
SR vs LR considerations
- May not be a problem if the country holds large reserves of foreign currency
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.