Syllabus: Pearson - AS Level Economics
Module: 2.1 Measures of Economic Performance
Lesson: 2.1.4 Balance of Payments

Introduction

The balance of payments (BoP) sits at the heart of understanding a country’s economic position in the global context. For students tackling Pearson Edexcel AS Level Economics (specifically Theme 2: The UK Economy – Performance and Policies), section 2.1.4 of the syllabus calls for an in-depth grasp of how the BoP works, its components, and its wider macroeconomic implications.

This topic not only addresses the technicalities of recording transactions with the rest of the world, it also links tightly with themes like exchange rates, trade policy, and economic performance. It’s vital for students to connect this concept with current affairs, trade balances, and international competitiveness, ensuring a practical grasp alongside academic understanding.

Key Concepts

Students should be able to:

• Define the balance of payments and its main components:

  • Current account (trade in goods and services, primary income, secondary income)

  • Capital account

  • Financial account

• Understand the causes and consequences of current account deficits and surpluses

• Evaluate measures to correct imbalances, including expenditure switching and expenditure reducing policies

• Analyse the relationship between the current account and exchange rates

• Use data to interpret trends in the UK’s BoP and compare with other economies

• Appreciate the interdependence of economies through global trade and capital flows

This unit is assessed with the expectation that students can interpret real data and apply economic reasoning to evaluate policy responses and potential trade-offs.

Real-World Relevance

The BoP is in the news more than students might realise. From Brexit’s impact on the UK’s trade balance to discussions around the US-China trade relationship, these aren’t abstract theories — they’re real forces shaping policy and performance.

Take the UK’s recent trade performance: persistent current account deficits have sparked debates about national competitiveness, productivity, and the structure of the economy. Meanwhile, countries like Germany have faced criticism for maintaining large surpluses, affecting exchange rates and EU-wide monetary policy.

A classroom case study could focus on the UK’s trade in services surplus (driven largely by financial services) versus its chronic goods trade deficit. Another angle is to look at how global events like COVID-19 or energy price shocks ripple through a country’s BoP figures.

How It’s Assessed

Students should expect to see:

• Data response questions: interpreting balance of payments statistics, identifying trends or anomalies.

• Short answer questions: definitions, calculations (e.g. current account balance), identifying components.

• Essay questions: often focus on evaluating policies to reduce a current account deficit, or discussing causes of persistent imbalances.

Common command words include:

• Explain (e.g. “Explain two components of the current account”)

• Analyse (e.g. “Analyse the effects of a fall in exports on the BoP”)

• Evaluate (e.g. “Evaluate policies to reduce the UK’s current account deficit”)

Students are expected to apply diagrams (such as supply and demand for currency) and demonstrate chains of reasoning.

Enterprise Skills Integration

This topic offers a rich context to develop several transferable skills:

• Problem solving: Analysing trade imbalances and proposing viable economic solutions.

• Decision-making: Weighing policy options and assessing short- vs long-term impacts.

• Numeracy: Working with real-world economic data to calculate and interpret key figures.

• Communication: Explaining complex macroeconomic relationships clearly and concisely.

You can embed mini-tasks where students act as economic advisors, analysing BoP data and briefing ‘policymakers’ (the class or a group) on potential strategies.

Careers Links

Understanding the balance of payments links directly to multiple sectors:

• Economics and finance: roles in Treasury, investment analysis, or international trade policy.

• Government and public sector: departments like the Department for Business and Trade or HM Treasury value candidates who can interpret macroeconomic indicators.

• Journalism and policy research: the ability to analyse data and contextualise it for wider audiences is crucial.

This content supports Gatsby Benchmarks 2, 4, and 5:

• Linking curriculum to careers

• Addressing the needs of each student

• Embedding career learning in subject teaching

Teaching Notes

Top tips:

• Use up-to-date ONS data and real news headlines to make content live and relevant.

• Anchor theory in familiar concepts (e.g. “Think of the BoP like your personal bank account — money coming in and out — but on a national scale”).

• Regularly check understanding of components. Students often confuse current and capital accounts.

Common pitfalls:

• Oversimplifying the causes of deficits/surpluses (it’s rarely just about imports and exports).

• Confusing nominal and real values when using data.

• Weak analysis when applying theory to policy debates.

Extension activities:

• Assign students a country and ask them to research its BoP history and recent trends.

• Run a mock policy debate on how to fix a trade deficit, with students arguing for different strategies.

Resources that work:

• Pearson’s official AS Economics textbook

• ONS economic indicators dashboard

• IMF country reports for data deep dives