DSE Economics | Balance of Payments and Exchange Rates Lesson-Prep Guide (Tutors)

2026-11-05

Tutor lesson-prep guides · Secondary Economics

Students can say that appreciation makes a currency stronger, then freeze when asked what happens to the foreign-currency price of a HK$780 export. One fixed conversion routine fixes that.

Objectives — Students can: (1) list the four current account components and compute the balance; (2) convert an exchange rate after a 10% appreciation by dividing by 1.1; (3) explain the effect of appreciation on export prices, import prices and the current account, stating the Marshall-Lerner condition.

01 Prerequisites (3-minute check)

If any of these fails, fix it before the lesson starts.

Skill	Quick check	Pass mark
Percentages	A 10% rise means multiplying by 1.1	Appreciation uses division
Demand and supply	Higher price, lower quantity demanded	Export price up, volume down
Elasticity	Elastic means responsive	Elasticity decides the revenue direction

02 Lesson flow (60 minutes)

Time	Stage	Tutor does	Student does
0-8 min	Diagnostic	Three oral conversions	Write the working
8-22 min	Current account	Four components and signs	Fill the table
22-36 min	Exchange-rate maths	Old rate divided by 1.1	Three scenarios
36-48 min	Effects of appreciation	Price, quantity, revenue	Layer the chain
48-56 min	Question practice	Calculation and discussion	Follow the steps
56-60 min	Exit check	Three quick questions	Oral answers

03 Teaching script (read it out)

Scene 1: Act 1: the current account is not just exports minus imports

Write the four components: goods, services, income, current transfers. Use one number set: goods deficit 120 billion, services surplus 380 billion, income inflow 250 billion and outflow 180 billion, so net income is 70 billion. The current account is -120 + 380 + 70 = 330 billion. Insist that every figure carries a sign before adding.

Students fill signs in the table, then add the column themselves and state surplus or deficit.

Scene 2: Act 2: appreciation has one conversion routine

The peg is 7.8 HKD per USD. A 10% appreciation means the new rate is the old rate divided by 1.1: 7.8 / 1.1 = 7.09. Take a HK$780 export: it cost 100.0 USD before and 110.01 USD now, up about 10.01%. Stronger HKD makes the same Hong Kong good dearer abroad, so export competitiveness falls.

Students repeat the routine for a 10% depreciation and state the reversed direction.

Scene 3: Act 3: appreciation does not automatically fix the current account

Marshall-Lerner: export elasticity 1.2 plus import elasticity 0.6 equals 1.8, above one, so depreciation would improve the current account with these parameters. If the two elasticities sum below one, volumes barely move and the balance can worsen. Every discussion answer must state the elasticity assumption first.

Pairs debate whether appreciation is good for Hong Kong; each side must quote one elasticity number.

04 Question types and worked steps

Type	Example	Steps	Answer
Current account balance	Goods -120, services +380, net income +70	Set signs, add item by item, state units	330 bn surplus
New exchange rate	7.80 per USD, 10% appreciation	Old rate divided by 1.1, two decimals	7.09
Export price in foreign currency	HK$780 good	Divide by the old rate, then the new rate, compare	USD 100.0 to 110.01
Discuss appreciation	HKD up 10%	Price, quantity, revenue, then elasticity	Depends on elasticities

Sanity check (teach this): Keep the direction consistent: a stronger HKD buys fewer HKD per dollar, so USD/HKD falls from 7.8 to 7.09, it does not rise. The export price rises from USD 100.0 to USD 110.01, about 10.01%, because the same local-currency value is converted. The current account balance of 330 billion is a surplus, so the sign must not be dropped.

05 Independent practice (3 questions)

Question	Answer	What to watch
Goods -80, services +200, net income -30: current account?	90 bn surplus	Signs dropped
7.80 per USD, 10% depreciation: new rate?	8.58	Multiply or divide
Export elasticity 1.2, import elasticity 0.6: does depreciation help?	Yes, sum 1.8	Condition stated

06 Common mistakes and what to say

Mistake	Student writes	Say this
Appreciation read as a higher rate	Writing 7.80 rising to 8.58	“If the HKD is stronger, does one USD buy more HKD?”
Multiplying the export price	Doing 780 times 1.1	“Are you converting a price or raising it?”
Current account as goods only	Dropping services and income	“Where do finance and tourism earnings go?”
No elasticity in discussion	Saying appreciation always hurts exports	“How much does volume actually fall?”

07 Homework (paper, section and question numbers)

Balance of payments practice set (in-house) — Questions 1-4: current account and rate conversion
Exchange-rate discussion (in-house) — Questions 5-6: effects and elasticity condition

08 Exit check (last 5 minutes)

Question	Answer	Decision
New rate after 10% appreciation from 7.80	7.09	Wrong: reteach division
Goods -120, services +380, net income +70	330 bn surplus	Wrong: reteach signs
Marshall-Lerner direction	Elasticities sum above one	Wrong: reteach elasticity

09 Tutor FAQ

Why divide for appreciation

The quote is HKD per USD, so a stronger HKD means fewer HKD per dollar; divide the old rate by 1.1.

Is a current account surplus always good

No. It can reflect weak domestic demand or excess saving, so read it with the cycle and the structure.

Why does Hong Kong run a services surplus

Finance, logistics, tourism and professional services exports outweigh the goods deficit, typical of a small open economy.

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A TutorZone lesson-prep guide. Written by the TutorZone team; questions and lesson flow are original and are not taken from any school or publisher material.