Balance of Payments and Distribution of Income
How a country measures its trade with the world through the current account, what a deficit or a surplus means, and how the gap between rich and poor households can be narrowed by taxation and government spending.
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Two more ways to judge an economy
An economy is judged on more than how much it produces. Two of the things a government watches are whether the country pays its way in trade with the rest of the world, and whether income is shared fairly between households. This module looks at the current account of the balance of payments and at how income is distributed and redistributed.
Trade and income terms
Learn these four terms before you use them.
Deficit against surplus
The current account is either in deficit or in surplus.
Find the balance, name the tool
To judge trade, list what a country sells abroad and what it buys, then subtract to see whether it runs a deficit or a surplus. To judge fairness, look at the gap between the richest and poorest households and at what moves income between them. Whenever you write about redistribution, always name a tool and say what it does.
Match the term
- deficit
- surplus
- current account
- redistribution
- buying more from abroad than is sold
- selling more abroad than is bought
- the record of trade with the world
- moving income from richer to poorer
What does a deficit mean?
What does it mean when the current account is in deficit?
- The country buys more goods and services from abroad than it sells.
- The country sells more abroad than it buys.
- Trade in and out is exactly equal.
- Income is shared equally between households.
Reasons for a deficit
Select the TWO reasons a country might run a current account deficit.
- Households buy many goods made abroad.
- Its exports are dearer than rival countries.
- Households save all of their income.
- Income is shared equally.
Work out the balance
In one year a country sold 500 units of exports and bought 620 units of imports. Subtract the exports from the imports to find the size of its current account deficit. What is the answer?
Order the working
Put the steps for finding the current account balance in order, earliest first.
- Add up what is sold abroad
- Add up what is bought from abroad
- Subtract one total from the other
- State whether it is a deficit or surplus
Complete the facts
The current account records a country trade with the world. It is in _____ when more is bought from abroad than sold, and in _____ when more is sold than bought. When income is shared very unequally, a government can narrow the gap through _____ taxation and through government _____.
Match the tool to its effect
- progressive tax
- cash benefits
- free public services
- grants to poorer areas
- takes a larger share from higher earners
- raises the income of the poorest households
- help those who could not otherwise pay
- lifts places that have fallen behind
Spot the redistribution tools
Tap the TWO tools a government uses to redistribute income.
- progressive tax
- cash benefits
- buying more imports
- running a deficit
Judge the case
Read each case and choose the best answer.
- A country sells 700 units abroad and buys 640. Is its current account in deficit or surplus?
- A government wants higher earners to give up a larger share of their income than lower earners. Which tool does this?
- The gap between the richest and poorest households is very wide. Which action would narrow it?
Explain balance and fairness
Explain how a country measures its current account balance and how a government can make the distribution of income fairer.
- Say what the current account records and what a deficit and a surplus each mean
- Give one reason a country might run a deficit
- Name two tools of redistribution and say what each one does to the gap between rich and poor