A2 Economics Revision - Data Description Revision on BoP

Just as with your AS exams from one year ago, AQA unit 4 macro papers contain data response questions and the first part involves drawing evidence from statistics either in table or chart format - a good example is the one above which tracks the current account balances for the UK and the USA from 1995 onwards. Note that 2010 and 2011 are labelled as forecasts - always something to pick up on when writing about the data in your answer.

A typical question might be

“Using the extract, identify tow points of comparison between the UK and US balance of payments on current account over the period shown by the data” (5 marks)

Key things to remember in the exam:

1/ You must back up your answers with actual data - dont leave them in the extract!
2/ Only two points of comparison are needed - not three! Only 5 marks are at stake!
3/ Look to see how the data is presented - in this case we are expressing data measured as a share of GDP rather than in US $s of British £s.

So in the example shown

a) The United States has run current account deficits throughout the period ranging from just under 1% of GDP in 1995 to over 6% of GDP in 2005. Since then the USA’s balance of payments deficit has narrowed to around 3% of national income but is forecast to widen in 2010-11

b) The USA’s balance of payments deficit has exceeded that of the UK for almost the entire period shown save for short periods in 1998 and the early part of 2009. The UK’s current account deficit has been more stable - averaging close to 2% of GDP - with two short periods of surplus / balance in the late 1990s.

The interesting macroeconomic development here is that the United States has seen a sizeable improvement in her current account position with the deficit halving in the space of a few years up to the end of 2009. This presumably reflects the impact of the recession on demand for imported goods and services. And also a reduction in the net flow of interest, profits and dividends out of the USA from foreign owned businesses and investments.

Movements in the US dollar exchange rate will also impact on the trade balance on goods and services and current account position. As my chart shows, in the short term the improvement in the US current account in 2008-09 was accompanied by an appreciation of the US dollar - perhaps an example here of the inverse J curve effect? I.e. a stronger dollar cuts the cost of importing goods and services.