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Balance of Payments · Paper 2 — Free Economics HL Practice Questions
1MasteryLAQCurrent account, capital account and financial account10 marksPaper 2~15 min
The following data refer to Kenya's balance of payments in 2022.
Account — Balance (USD billion)
Current account —
Capital account —
Financial account —
Kenya relies heavily on imports of machinery and fuel, and exports tea, coffee, and cut flowers. Foreign direct investment (FDI) inflows into Kenya's technology sector increased by in 2022.
(a)
Calculate the overall balance of payments for Kenya in 2022. State whether the overall balance is in surplus or deficit. [2 marks]
(b)
Using the data, explain how Kenya's current account deficit is financed by the capital and financial accounts. [3 marks]
(c)
With reference to the data and real-world examples, evaluate whether a persistent current account deficit is likely to be harmful to Kenya's economy, given the composition of its exports and the nature of its capital inflows. [5 marks]
Solutions
2MasteryLAQCurrent account, capital account and financial account10 marksPaper 2~15 min
In 2023, Brazil recorded a current account surplus of USD 12 billion, driven by strong exports of soybeans, iron ore, and crude oil. The financial account recorded a deficit of USD 10 billion, as Brazilian firms and investors increased their holdings of foreign assets. The capital account recorded a deficit of USD 2 billion, mainly due to debt forgiveness granted to other developing nations. Brazil's central bank did not intervene in foreign exchange markets.
(a)
Using the data, calculate the overall balance of payments for Brazil in 2023 and state whether it is in surplus, deficit, or equilibrium. [2 marks]
(b)
Using the concept of double-entry accounting, explain why Brazil's current account surplus is necessarily matched by deficits on the financial and capital accounts. [3 marks]
(c)
Evaluate the possible economic impacts of Brazil's current account surplus on its domestic economy and on its trading partners. [5 marks]
Solutions
3MasteryLAQCurrent account, capital account and financial account10 marksPaper 2~15 min
The Southeast Asian nation of Meridian has experienced strong economic growth. In 2024, its balance of payments recorded the following:
- Current account: surplus of USD 60 billion
- Capital account: deficit of USD 2 billion
- Financial account (excluding reserve assets): deficit of USD 55 billion
- Change in official reserve assets: increase of USD 3 billion
(a)
Define the term current account and state two components typically recorded within it. [2 marks]
(b)
Calculate the combined balance of the current account, capital account, and financial account (excluding reserve assets) for Meridian in 2024. [2 marks]
(c)
Explain how the change in official reserve assets ensures that Meridian's balance of payments satisfies the balance of payments identity. [2 marks]
(d)
Evaluate the view that a current account surplus is always beneficial for an economy. Refer to Meridian and consider the perspective of its trading partners in your answer. [4 marks]
Solutions
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