6.5

Balance of payments

Cambridge IGCSE Economics (0455)  · Unit 6: International trade and globalisation  · 10 flashcards

Balance of payments is topic 6.5 in the Cambridge IGCSE Economics (0455) syllabus , positioned in Unit 6 — International trade and globalisation , alongside International specialisation, Globalisation and multinational companies and Free trade and protection.  In one line: The balance of payments (BOP) is a record of all economic transactions between residents of one country and the rest of the world in a specific period (usually a year). It includes the current account, capital account, and financial account.

This topic is examined in Paper 1 (multiple-choice) and Paper 2 (structured questions, including data-response items).

The deck below contains 10 flashcards — 5 definitions, 4 key concepts and 1 application card — covering the precise wording mark schemes reward.  Use the 5 definition cards to lock down command-word answers (define, state), then move on to the concept and application cards to handle explain, describe and compare questions.

Key definition

The balance of payments

The balance of payments (BOP) is a record of all economic transactions between residents of one country and the rest of the world in a specific period (usually a year). It includes the current account, capital account, and financial account.

Questions this Balance of payments deck will help you answer

Definition Flip

Define the balance of payments.

Answer Flip

The balance of payments (BOP) is a record of all economic transactions between residents of one country and the rest of the world in a specific period (usually a year). It includes the current account, capital account, and financial account.

Key Concept Flip

What are the main components of the current account?

Answer Flip

The current account consists of the balance of trade in goods (visible trade), the balance of trade in services (invisible trade), net primary income (

Example: investment income), and net secondary income (. transfers).
Definition Flip

Explain the difference between visible and invisible trade.

Answer Flip

Visible trade refers to the exchange of physical goods, such as cars or electronics. Invisible trade involves the exchange of services, such as tourism or financial services.

Key Concept Flip

What does a current account deficit indicate?

Answer Flip

A current account deficit means that a country is importing more goods and services than it is exporting. It may indicate a lack of competitiveness or strong domestic demand.

Definition Flip

Describe what the capital account records.

Answer Flip

The capital account primarily records capital transfers (

Example: debt forgiveness) and the acquisition/disposal of non-produced, non-financial assets (. patents). It is relatively small for most countries.
Definition Flip

What type of transactions are recorded in the financial account?

Answer Flip

The financial account records transactions involving financial assets and liabilities, such as foreign direct investment (FDI), portfolio investment (

Example: stocks and bonds), and reserve assets held by the central bank.
Definition Flip

What is meant by a 'trade balance'?

Answer Flip

The trade balance is the difference between a country's exports of goods and services and its imports of goods and services. A positive balance is a surplus, and a negative balance is a deficit.

Key Concept Flip

Explain one possible cause of a current account surplus.

Answer Flip

A current account surplus can be caused by strong export competitiveness due to lower production costs or higher quality goods, leading to higher demand for a country's products abroad.

Key Concept Flip

What are some potential consequences of a persistent current account deficit?

Answer Flip

A persistent current account deficit can lead to increased foreign debt, currency depreciation, and potentially reduced economic growth if not managed effectively. Countries may require loans to finance the deficit.

Key Concept Flip

How can a government reduce a current account deficit?

Answer Flip

Governments can implement policies to increase exports (

Example: export subsidies) or decrease imports (. tariffs). They can also pursue policies to improve domestic competitiveness, such as investing in education and infrastructure.

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Practice with MCQ questions to check your understanding.

Take Economics Quiz
6.4 Foreign exchange rates

Key Questions: Balance of payments

Define the balance of payments.

The balance of payments (BOP) is a record of all economic transactions between residents of one country and the rest of the world in a specific period (usually a year). It includes the current account, capital account, and financial account.

Explain the difference between visible and invisible trade.

Visible trade refers to the exchange of physical goods, such as cars or electronics. Invisible trade involves the exchange of services, such as tourism or financial services.

Describe what the capital account records.

The capital account primarily records capital transfers (

Example: debt forgiveness) and the acquisition/disposal of non-produced, non-financial assets (. patents). It is relatively small for most countries.
What type of transactions are recorded in the financial account?

The financial account records transactions involving financial assets and liabilities, such as foreign direct investment (FDI), portfolio investment (

Example: stocks and bonds), and reserve assets held by the central bank.
What is meant by a 'trade balance'?

The trade balance is the difference between a country's exports of goods and services and its imports of goods and services. A positive balance is a surplus, and a negative balance is a deficit.

More topics in Unit 6 — International trade and globalisation

Balance of payments sits alongside these Economics decks in the same syllabus unit. Each uses the same spaced-repetition system, so progress in one informs the next.

6.1 International specialisation

9 flashcards
6.2 Globalisation and multinational companies

9 flashcards
6.3 Free trade and protection

10 flashcards
6.4 Foreign exchange rates

9 flashcards

Cambridge syllabus keywords to use in your answers

These are the official Cambridge 0455 terms tagged to this section. Mark schemes credit responses that use the exact term — weave them into your answers verbatim rather than paraphrasing.

balance of payments current account capital account financial account trade balance deficit surplus invisible trade visible trade

Key terms covered in this Balance of payments deck

Every term below is defined in the flashcards above. Use the list as a quick recall test before your exam — if you can't define one of these in your own words, flip back to that card.

The balance of payments
Explain the difference between visible and invisible trade
Describe what the capital account records
What type of transactions are recorded in the financial account
Meant by a 'trade balance'

How to study this Balance of payments deck

Start in Study Mode, attempt each card before flipping, then rate Hard, Okay or Easy. Cards you rate Hard come back within a day; cards you rate Easy push out to weeks. Your progress is saved in your browser, so come back daily for 5–10 minute reviews until every card reads Mastered.