The balance of payments is a record of all financial transactions between the UK and the rest of the world. For GCSE, the part that matters is the current account.
Balance of trade = exports − imports of goods and services. (AQA’s vocabulary list mentions only goods, but its exam papers use goods and services: follow the papers.)
Current account balance = balance of trade + primary income balance + secondary income balance.
Money coming in counts as a plus; money going out counts as a minus.
Part of the current account
What it records
Example of money coming into the UK
Trade in goods
Exports and imports of physical products
A French buyer pays for UK-made cars
Trade in services
Exports and imports of services
A US bank pays a London law firm
Primary income
Income from investments and work abroad: profits, interest, dividends, wages
Profits a UK firm earns from its factory abroad
Secondary income
Transfers with nothing traded in return: overseas aid, money sent home by migrants
Money sent to a UK family by a relative working abroad
The four parts of the current account
Exam tipExaminers report gaps in students’ knowledge of what makes up the balance of payments. Learn the four parts and one example of each: this area appears in some form on Paper 2 almost every year.
Balance of payments
A record of all financial transactions between a country and the rest of the world.
Current account
The part of the balance of payments that records trade in goods and services, plus primary and secondary income.
Balance of trade
The value of exports minus the value of imports of goods and services.
3.2.2.5 Simple calculations using current account figures
Calculating the trade balance and the current account
Every answer must say which way the balance goes: surplus (plus) or deficit (minus). A correct number with no direction loses a mark.
Worked exampleThe invented country of Rennick has exports of goods £300bn, exports of services £250bn, imports of goods £420bn and imports of services £170bn. Calculate its balance of trade.
Exports = 300 + 250 = £550bnAdd goods and services.
Imports = 420 + 170 = £590bnAdd goods and services.
Balance = 550 − 590 = −£40bnExports minus imports.
A trade deficit of £40bn (−£40bn)
Worked exampleRennick also has a primary income surplus of £5bn and a secondary income deficit of £20bn. Calculate its current account balance.
−40 + 5 − 20Trade balance + primary income + secondary income. A deficit is a minus.
= −55
A current account deficit of £55bn
Worked exampleReal data: in 2025 UK exports were £913bn and imports £953bn (ONS). The current account deficit was £91.6bn. What was the combined balance on primary and secondary income?
Trade balance = 913 − 953 = −£40bn
−91.6 − (−40) = −51.6Current account minus trade balance leaves the income balances.
A combined deficit of £51.6bn on primary and secondary income
Exam tipWork in the units given (£ million or £ billion) and keep them: millions and billions are often muddled. If a table already shows a deficit, it is a minus even if no minus sign is printed.
Watch outAQA’s vocabulary list writes a current account deficit as ‘X > M’. That is a slip: a deficit means imports are bigger than exports (M > X).
3.2.2.5 Meaning and significance of a deficit and surplus
Current account deficits and surpluses: why they matter
A surplus adds to demand and jobs at home, but a very large surplus means the country is consuming less than it produces, and may cause friction with trading partners.
Why a deficit can be a problem
Why it may not matter much
Spending on imports is demand that goes abroad, so fewer jobs and less output at home
A small deficit (as a % of GDP) is easy to finance
It must be paid for by borrowing from abroad or selling UK assets (firms, property) to foreign owners
Foreign investment into the UK can bring jobs and technology
It may show UK firms are not competitive (prices too high or quality too low)
It may reflect strong UK incomes: people can afford imports
A large, persistent deficit can lead to a sudden fall in the pound if investors lose confidence
A floating exchange rate can fall gradually, making exports cheaper and correcting it
Don’t confuse the three deficitsBudget deficit: government spending is more than its revenue in a year. Trade deficit: imports are more than exports. Current account deficit: the trade balance plus primary and secondary income is negative. Examiners report students mixing up the budget balance and the trade balance. (The budget is in Taxation, Government Spending and Fiscal Policy.)
Current account deficit
When outflows on the current account are greater than inflows (imports of goods and services are greater than exports, after income flows).
Current account surplus
When inflows on the current account are greater than outflows.
3.2.2.5 Reasons for a deficit or surplus
Reasons for a deficit or surplus
Reverse each cause for a surplus: a weak currency, low inflation, high productivity, a strong export industry or fast growth abroad.
The UK’s pattern: a large deficit on goods and a surplus on services, because the UK specialises in financial and professional services.
Cause
How it pushes towards a deficit
Fast economic growth at home
Higher incomes mean people buy more of everything, including imports
A strong exchange rate
Exports are dearer abroad and imports cheaper at home
Higher inflation than trading partners
UK goods become relatively expensive, so exports fall and imports rise
Low productivity
Low output per worker raises costs per unit, so UK prices are less competitive
Decline of manufacturing
The UK makes fewer of the goods it buys, so it imports them
Slow growth or recession abroad
Trading partners buy fewer UK exports
Exam tipProductivity is output per worker, not total production. In one exam, students ‘rarely saw how to use the problem of low productivity’ to explain a deficit. The chain is: low productivity → higher costs per unit → higher prices → less competitive exports and cheaper imports win sales → deficit.
3.2.2.5 Government policies to influence the balance of payments
Policies to influence the current account
Interest rates are set by the Bank of England to meet the inflation target, not to target the current account, but they do affect the pound (see the market for pounds below).
Policies conflict: cutting a deficit by slowing the economy can cost jobs and growth. Conflicts between objectives are covered in Government Objectives and Economic Growth.
Raise productivity and quality, so UK goods are more competitive
Slow to work; costly
Contractionary fiscal policy (higher taxes or less spending)
Lower incomes cut spending on imports
Also cuts spending on UK goods: slower growth, more unemployment
A lower exchange rate
Exports cheaper, imports dearer
Raises inflation; imported inputs cost more
Tariffs or quotas on imports
Make imports dearer or limit them
Retaliation; higher prices for consumers; may break trade agreements
Exam tipName the policy, then explain the chain to exports or imports. ‘The government should export more’ is not a policy.
3.2.4.2 Exchange rates
Exchange rates: appreciation and depreciation
An exchange rate is the value of one currency in terms of another, for example £1 = $1.35. It tells you how much foreign currency one pound buys.
Appreciation: the pound rises in value. £1 buys more foreign currency (e.g. from $1.35 to $1.50). Also called a stronger pound.
Depreciation: the pound falls in value. £1 buys less foreign currency (e.g. from $1.35 to $1.20). A weaker pound.
The UK has a floating exchange rate: its value is set by demand and supply in the foreign exchange market, not fixed by the government.
On 5 November 2026, £1 was worth about $1.35 and about €1.20 (Bank of England). Rates change every day.
Worked exampleA hotel in New York costs $540. How much is this in pounds at £1 = $1.35, and at £1 = $1.50?
At $1.35: 540 ÷ 1.35 = £400To turn dollars into pounds, divide by the number of dollars per pound.
At $1.50: 540 ÷ 1.50 = £360The pound has appreciated, so it buys more dollars.
% change = (360 − 400) ÷ 400 × 100 = −10%New minus original, divided by the original.
£400, then £360: the hotel is 10% cheaper for a UK visitor after the appreciation
Worked exampleA UK firm sells a machine for £2,000. What is its price in dollars at £1 = $1.35?
2,000 × 1.35 = $2,700To turn pounds into dollars, multiply.
$2,700
Divide or multiply?Pounds → foreign currency: multiply by the rate. Foreign currency → pounds: divide by the rate. Check your answer makes sense: at $1.35 to the pound, a dollar price should be a bigger number than the pound price.
Exchange rate
The value of one currency in terms of another, e.g. £1 = $1.35.
Appreciation
A rise in the value of a currency against another.
Depreciation
A fall in the value of a currency against another.
Floating exchange rate
An exchange rate set by demand and supply in the currency market, without government intervention.
3.2.4.2 How exchange rates are determined
How demand and supply set the exchange rate
The pound has a price like anything else. In the market for pounds, the price is the exchange rate (up the side) and the quantity is the quantity of pounds traded (along the bottom).
Demand for £ rises (shifts right, D to D1) → the exchange rate rises: appreciation.
Demand for £ falls (shifts left) → depreciation.
Supply of £ rises (shifts right, S to S1) → the exchange rate falls: depreciation.
Supply of £ falls (shifts left) → appreciation.
Example: on 5 November 2026 the Bank of England raised Bank Rate from 3.75% to 4%. Other things equal, higher UK interest rates attract savings from abroad, which raises demand for pounds.
Demand for £ comes from foreigners who need pounds
Supply of £ comes from UK people and firms swapping pounds for foreign currency
To buy UK exports (goods and services, including holidays in the UK)
To buy imports (goods, services, holidays abroad)
To save in UK banks when UK interest rates are relatively high (‘hot money’)
To save abroad when foreign interest rates are relatively high
To invest in the UK (build factories, buy UK firms): inward investment
To invest abroad: outward investment
The market for pounds: equilibrium exchange rate ER
Demand for pounds rises: the pound appreciates
Supply of pounds rises: the pound depreciates
How to draw it (3 marks)1. Axes: exchange rate (e.g. $ per £) up the side, quantity of £ along the bottom; draw D and S and mark the original rate and quantity. 2. Shift the correct curve the correct way and label it D1 or S1. 3. Mark the new exchange rate and quantity, showing whether the rate is higher or lower. Shifting demand when supply should move scores no more than 1 mark.
Exam tipMore UK exports → more demand for £. More UK imports → more supply of £. Fewer than a third of students got a recent multiple-choice question on this right, so learn the two flows.
Hot money
Savings that move between countries to earn the highest interest rate.
Foreign direct investment (FDI)
A firm from one country investing in buildings, machinery or firms in another.
3.2.4.2 The effects of changes in the exchange rate on consumers
Effects of a stronger or weaker pound on consumers
Consumers are also workers. A stronger pound helps them as shoppers, but if their employer exports, their job may be less secure.
Memory aid (a teacher’s acronym, not AQA’s): SPICED: Strong Pound, Imports Cheap, Exports Dear.
Pound appreciates (stronger)
Pound depreciates (weaker)
Imported goods are cheaper
Imported goods are dearer
Holidays abroad cost less
Holidays abroad cost more
UK products made with imported parts, food or fuel may fall in price
UK products made with imported parts, food or fuel may rise in price
Lower inflation, so real incomes go further
Higher inflation, which squeezes real incomes
A stronger pound and a weaker pound compared
3.2.4.2 The effects of changes in the exchange rate on producers
Effects on producers and the wider economy
It depends: many firms both import inputs and export products, so the gains and losses partly cancel out.
Price isn’t everything: a weaker pound makes exports cheaper, but if quality or design don’t appeal, foreign buyers may not buy more.
Effects take time: firms may have contracts at fixed prices, and buyers take time to switch suppliers.
Pound appreciates
Pound depreciates
Exporters
Prices abroad rise, so sales may fall
Prices abroad fall, so sales may rise
Firms using imported inputs
Cheaper materials and parts: costs fall
Dearer materials and parts: costs rise
Firms competing with imports
Foreign rivals look cheaper
Foreign rivals look dearer
Inflation
Tends to fall (cheaper imports)
Tends to rise (cost-push from dearer imports)
Unemployment
Can rise as exporters and import-competing firms lose sales
Can fall as exporters sell more
Current account
Tends to worsen
Tends to improve
Exam tipA higher exchange rate is most likely to increase unemployment, because exports become dearer. Only 1 in 8 students got this right in one exam. Follow the chain: stronger pound → exports dearer → fewer export sales → firms cut output → fewer jobs.
3.2.2.5, 3.2.4.2 UK data
The UK’s current account and the pound: recent figures
Figures change every quarter and every day, so learn how to read them. As of November 2026 (last checked 7 November 2026):
The pattern to remember: the UK runs a current account deficit, with a large deficit on goods partly offset by a surplus on services.
To compare years or countries, use the balance as a percentage of GDP: £91.6bn sounds huge, but it is about 3% of the UK’s £3.04 trillion GDP in 2025.
Measure
Figure
Date and source
Current account
Deficit of £91.6 billion, about 3.0% of GDP
2025; ONS, published 30 September 2026
Current account
Deficit of £19.9 billion (2.5% of GDP)
April to June 2026; ONS
Trade in goods and services
Deficit of £8.0 billion: goods deficit £59.1bn, services surplus £51.1bn
Three months to August 2026; ONS, published 15 October 2026
Exchange rate
£1 ≈ $1.35 and ≈ €1.20
5 November 2026; Bank of England
Older papersAQA’s past papers quote exchange rates and balances from 2016–2021. Use them for practice, but not as current facts.
Genious