ConceptConceptDocsDocuments

IB Economics 4.6 Balance of payments

Practise balance-of-payments calculations and exchange-rate diagrams, then evaluate persistent deficits, capital flows and policy correction in IB Economics HL questions.

Syllabus
First assessment 2022
Course
IB Economics
Level
HL

Exam points

  • Calculate current-account and balance-of-trade figures from tables, then identify a surplus or deficit.
  • Use account identities and exchange-rate diagrams to explain how deficits, surpluses and capital flows connect.
  • Evaluate depreciation, demand and supply-side measures to correct a persistent current-account deficit.

Covered syllabus points

4.6.1—Balance of payments4.6.2—Components of the balance of payments4.6.3—Interdependence between accounts4.6.4 (HL)—Current account and exchange rate4.6.5 (HL)—Financial account and exchange rate4.6.6 (HL)—Persistent current account deficit4.6.7 (HL)—Marshall-Lerner condition and J-curve4.6.8 (HL)—Persistent current account surplus

4.6 Balance of payments question 1

[Maximum number: 8]

The following diagram illustrates the domestic market for rice in Country Alpha. This diagram will be used for several of the following questions.

Figure for Question 4.6 Balance of payments question 1 — IB Economics HL

Question (a)

(a)

The following table provides selected data from the balance of payments for Alpha for 2016.

Table 1

Table 1

[ 4 ]

Question (i)

(i)

Using the data in Table 1, calculate Alpha's current account balance for 2016.

[ 2 ]

Question (ii)

(ii)

Outline how Alpha's current account balance for 2016 is likely to affect the exchange rate of its currency.

[ 2 ]

Question (b)

(b)

Following the depreciation, it is observed that the current account balance worsens initially, but improves after a certain period of time. Explain why this might be expected to happen.

[ 4 ]

4.6 Balance of payments question 2

[Maximum number: 14]

Table 1 shows the gross domestic product (GDP) of the United States of America (USA) economy from 2020 to 2023. The USA is not the fastest growing economy in the world, but it is the largest. It also has the largest budget deficit and the largest current account deficit in the world. As a result, the actions of its central bank, the Federal Reserve, always make news.

Table 1

Table 1

Question (a)

(a)

Using Table 2, calculate the deficit or surplus in the balance of trade in goods and services for Quarter 3 (Q3) only.

[ 1 ]

Question (b)

(b)

Using Table 2, calculate the size of the financial account for Quarter 4 (Q4) only.

The USA recorded a trade deficit of USD 819 billion in 2023. This was a slight reduction from 2022, when it was USD 951 billion. One of the reasons for the fall in the trade deficit could be the exchange rate. In the final four months of the year, the USD depreciated against the Chinese Yuan (CNY). China is the USA's largest trading partner, even though recent trade relations between the two countries have been characterized by tariffs and retaliatory measures. Figure 1 shows the price of the USD in terms of the CNY from September to December 2023.

Figure 1

Figure 1

[ 3 ]

Question (c)

(c)

Using the text/data provided and your knowledge of economics, recommend a policy that the government of the USA could introduce to correct its persistent current account deficit, without intervention in foreign exchange markets.

[ 10 ]
All question bank results loaded