Ch10 International econ 13th edition

7/27/2019 Ch10 International econ 13th edition

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CHAPTER 10THE BALANCE OF PAYMENTS

MULTIPLE CHOICE

1. On the balance-of-payments statements, merchandise imports are classified in the:a.

Current account

b

.

Capital account

c.

Unilateral transfer account

d.

Official settlements account

ANS: A PS: 1

!. he balance of international indebtedness is a record of a country"s international:a.

#n$estment position o$er a period of time

b.

#n$estment position at a fi%ed point in time

c.

rade position o$er a period of time

d.

rade position at a fi%ed point in time

ANS: & PS: 1

'. (hich balance-of-payments item does not directly enter into the calculation of the U.S. )ross domestic

product*a.

+erchandise imports

b.

Shippin) and transportation receipts

c.

irect forei)n in$estment

d.

Ser$ice e%ports

ANS: C PS: 1

. (hich of the folloin) is considered a capital inflo*a.

A sale of U.S. financial assets to a forei)n buyer

b.

A loan from a U.S. ban/ to a forei)n borroer

c.

A purchase of forei)n financial assets by a U.S. buyer

d A U.S. citi0en"s repayment of a loan from a forei)n ban/


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.

ANS: A PS: 1

. (hich of the folloin) ould call for inpayments to the United States*a.

American imports of 2erman steel

b. 2old floin) out of the United States

c.

American unilateral transfers to less-de$eloped countries

d.

American firms sellin) insurance to &ritish shippin) companies

ANS: PS: 1

3. #n a country"s balance of payments, hich of the folloin) transactions are debits*a

.

omestic ban/ balances oned by forei)ners are decreased

b.

4orei)n ban/ balances oned by domestic residents are decreased

c.

Assets oned by domestic residents are sold to nonresidents

d.

Securities are sold by domestic residents to nonresidents

ANS: A PS: 1

5. (hich of the folloin) is classified as a credit in the U.S. balance of payments*

a.

U.S. e%ports

b.

U.S. )ifts to other countries

c.

A flo of )old out of the U.S.

d.

4orei)n loans made by U.S. companies

ANS: A PS: 1

Table 10.1 gives hypothetical figures for U.S. International Transactions.

Table 10.1. U.S. International Trana!tion

Amountransaction 6billions of dollars7

+erchandise imports 118


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+ilitary transactions, net -9emittances, pensions, transfers -!8U.S. pri$ate assets abroad -8+erchandise e%ports 11#n$estment income, net 1U.S. )o$ernment )rants -6e%cludin) military74orei)n pri$ate assets in the U.S. !Compensation of employees -

Allocation of S9s ra$el and transportation receipts, net !8

. 9eferrin) to able 18.1, the )oods and ser$ices balance e;uals:a.

ANS: C PS: 1

=. 9eferrin) to able 18.1, the current account balance e;uals:a.

18. Unli/e the balance of payments, the balance of international indebtedness indicates the international:a.

#n$estment position of a country at a )i$en moment in time

b.

#n$estment position of a country o$er a one-year period

c.

rade position of a country at a )i$en moment in time

d.

rade position of a country o$er a one-year period

ANS: A PS: 1


4/18

11. (hich of the folloin) indicates the international in$estment position of a country at a )i$en momentin time*a.

he balance of payments

b.

he capital account of the balance of payments

c.

he current account of the balance of payments

d

.

he balance of international indebtedness

ANS: PS: 1

1!. Concernin) the U.S. balance of payments, hich account is defined in essentially the same ay as thenet e%port of )oods and ser$ices, hich comprises part of the country"s )ross domestic product*a.

+erchandise trade account

b.

2oods and ser$ices account

c.

Current account

d.

Capital account

ANS: & PS: 1

1'. #f an American recei$es di$idends from the shares of stoc/ she or he ons in oyota, #nc., a >apanesefirm, the transaction ould be recorded on the U.S. balance of payments as a:a.

Capital account debit

b. Capital account credit

c.

Current account debit

d.

Current account credit

ANS: PS: 1

1. #f the United States )o$ernment sells military hardare to Saudi Arabia, the transaction ould berecorded on the U.S. balance of payments as a:

a.

Current account debit

b.

Current account credit

c.

Capital account debit

d.

Capital account credit


5/18

ANS: & PS: 1

1. he U.S. balance of trade is determined by:a.

?%chan)e rates

b.

2roth of economies o$erseas

c.

9elati$e prices in orld mar/ets

d.

All of the abo$e

ANS: PS: 1

13. U.S. military aid )ranted to forei)n countries is entered in the:a.

+erchandise trade account

b

.

Capital account

c.

Current account

d.

Official settlements account

ANS: C PS: 1

15. #f the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:a.

he official settlements account

b.

he capital account

c.

?ither the official settlements account or the capital account

d.

&oth the official settlements account and the capital account

ANS: C PS: 1

1. he current account of the U.S. balance of payments does not include:a

.

#n$estment income

b.

+erchandise e%ports and imports

c.

he sale of securities to forei)ners

d.

Unilateral transfers


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ANS: C PS: 1

1=. he U.S. has a balance of trade deficit hen its:a.

+erchandise e%ports e%ceed its merchandise imports

b.

+erchandise imports e%ceed its merchandise e%ports

c.

2oods and ser$ices e%ports e%ceed its )oods and ser$ices imports

d.

2oods and ser$ices imports e%ceed its )oods and ser$ices e%ports

ANS: & PS: 1

!8. he $alue to American residents of income earned from o$erseas in$estments shos up in hichaccount in the U.S. balance of payments*a.

Current account

b. rade account

c.

Unilateral transfers account

d.

Capital account

ANS: A PS: 1

Table 10.". International In#et$ent Poition o% t&e Unite' State

U.S. assets abroad U.S. )o$ernment assets 4orei)n assets in the U.S. 4orei)n official assets


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ANS: & PS: 1

!!. 4or the first time since (orld (ar #, in 1= the United States became a net international:a.

?%porter

b.

#mporter

c.

ebtor

d.

Creditor

ANS: C PS: 1

!'. A country that is a net international debtor initially e%periences:a.

An au)mented sa$in)s pool a$ailable to finance domestic spendin)

b

.

A hi)her interest rate, hich leads to loer domestic in$estment

c.

A loss of funds to tradin) partners o$erseas

d.

A decrease in its ser$ices e%ports to other countries

ANS: A PS: 1

!. Credit 6@7 items in the balance of payments correspond to anythin) that:a.

#n$ol$es receipts from forei)ners

b.

#n$ol$es payments to forei)ners

c.

ecreases the domestic money supply

d.

#ncreases the demand for forei)n e%chan)e

ANS: A PS: 1

!. ebt 6-7 items in the balance of payments correspond to anythin) that:a

.

#n$ol$es receipts from forei)ners

b.

#n$ol$es payments to forei)ners

c.

#ncreases the domestic money supply

d.

ecreases the demand for forei)n e%chan)e


8/18

ANS: & PS: 1

!3. (hen all of the debit or credit items in the balance of payments are combined:a.

+erchandise imports e;ual merchandise e%ports

b.

Capital imports e;ual capital e%ports

c.

Ser$ices e%ports e;ual ser$ices imports

d.

he total surplus or deficit e;uals 0ero

ANS: PS: 1

!5. #n the balance of payments, the statistical discrepancy is used to:a.

?nsure that the sum of all debits matches the sum of all credits

b

.

?nsure that trade imports e;ual the $alue of trade e%ports

c.

Obtain an accurate account of a balance-of-payments deficit

d.

Obtain an accurate account of a balance-of-payments surplus

ANS: A PS: 1

!. All of the folloin) are credit items in the balance of payments, e%cept:a.

#n$estment inflos

b.

+erchandise e%ports

c.

Payments for American ser$ices to forei)ners

d.

Pri$ate )ifts to forei)n residents

ANS: PS: 1

!=. All of the folloin) are debit items in the balance of payments, e%cept:a

.

Capital outflos

b.

+erchandise e%ports

c.

Pri$ate )ifts to forei)ners

d.

4orei)n aid )ranted to other nations


9/18

ANS: & PS: 1

'8. he role of is to direct one nation"s sa$in)s into another nation"s in$estments:a.

+erchandise trade flos

b.

Ser$ices flos

c.

Current account flos

d.

Capital flos

ANS: PS: 1

'1. (hen a country reali0es a deficit on its current account:a.

#ts net forei)n in$estment position becomes positi$e

b

.

#t becomes a net demander of funds from other countries

c.

#t reali0es an e%cess of imports o$er e%ports on )oods and ser$ices

d.

#t becomes a net supplier of funds to other countries

ANS: & PS: 1

'!. 9educin) a current account deficit re;uires a country to:a.

#ncrease pri$ate sa$in) relati$e to in$estment

b.

#ncrease pri$ate consumption relati$e to sa$in)

c.

#ncrease pri$ate in$estment relati$e to consumption

d.

#ncrease pri$ate in$estment relati$e to sa$in)

ANS: A PS: 1

''. 9educin) a current account deficit re;uires a country to:a

.

#ncrease the )o$ernment"s deficit and increase pri$ate in$estment relati$e to sa$in)

b.

#ncrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)

c.

ecrease the )o$ernment"s deficit increase pri$ate in$estment relati$e to sa$in)

d.

ecrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)


10/18

ANS: PS: 1

'. 9educin) a current account surplus re;uires a country to:a.

#ncrease the )o$ernment"s deficit and increase pri$ate in$estment relati$e to sa$in)

b.

#ncrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)

c.

ecrease the )o$ernment"s deficit and increase pri$ate in$estment relati$e to sa$in)

d.

ecrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)

ANS: A PS: 1

'. Concernin) a country"s business cycle, rapid )roth of production and employment is commonlyassociated ith:a.

Bar)e or )roin) trade deficits and current account deficits

b. Bar)e or )roin) trade deficits and current account surpluses

c.

Small or shrin/in) trade deficits and current account deficits

d.

Small or shrin/in) trade deficits and current account surpluses

ANS: A PS: 1

'3. he burden of a current account deficit ould be the least if a nation uses hat it borros to finance:a

.

Unemployment compensation benefits

b.

Social Security benefits

c.

?%penditures on food and recreation

d.

#n$estment on plant and e;uipment

ANS: PS: 1

'5. Concernin) a country"s business cycle, is commonly associated ith lar)e or )roin) current

account deficits:a.

9apid )roth rates of production and employment

b.

Slo )roth rates of production and employment

c.

4allin) interest rates on )o$ernment securities

d.

4allin) interest rates on corporate securities


11/18

ANS: A PS: 1

'. Accordin) to researchers at the 4ederal 9eser$e, the loss of obs associated ith a deficit in the currentaccount tends to be:a.

Offset by the increase of obs associated ith a surplus in the capital account

b. 9einforced by the decrease of obs associated ith a surplus in the capital account

c.

A threat to the le$el of employment for the economy as a hole

d.

Of no lon)-run economic conse;uence for or/ers ho lose their obs

ANS: A PS: 1

TRUE(FALSE

Table 10.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a year.

Table 10.). International Trana!tion o% t&e Unite' State

Amount6billions of dollars7ransaction

Allocation of S9s 18Chan)es in U.S. assets abroad 188Statistical discrepancy -1+erchandise imports -88Payments on forei)n assets in U.S. -!8

9emittances, pensions, transfers -38ra$el and transportation receipts, net '8+ilitary transactions, net -18#n$estment income, net 188+erchandise e%ports '8U.S. )o$ernment )rants 6e%cludin) military7 -!8Chan)es in forei)n assets in the U.S. 1=8Other ser$ices, net 89eceipts on U.S. in$estments abroad '8Compensation of employees -18

1. 9efer to able 18.'. he merchandise-trade balance re)istered a deficit of


12/18

'. 9efer to able 18.'. he )oods-and-ser$ices balance re)istered a surplus of


13/18

ANS: PS: 1

1. he D)oods and ser$icesD account of the balance of payments shos the monetary $alue ofinternational flos associated ith transactions in )oods, ser$ices, and unilateral transfers.

ANS: 4 PS: 1

1. An increase in import restrictions by the U.S. )o$ernment tends to promote a merchandise-trade

surplus.

ANS: PS: 1

13. Ser$ices transactions on Canada"s balance-of-payments statement ould include Canadian shipstransportin) lumber to >apan, forei)n tourists spendin) money in Canada, and Canadian en)ineersdesi)nin) brid)es in China.

ANS: PS: 1

15. On the balance-of-payments statement, di$idend and interest income are classified as capital-accounttransactions.

ANS: 4 PS: 1

1. A surplus on 2ermany"s )oods-and-ser$ices balance indicates that 2ermany has sold more )oods andser$ices to forei)ners than it has bou)ht from them o$er a one-year period.

ANS: PS: 1

1=. he merchandise-trade account on the balance-of-payments statement is defined the same ay as Dnete%portsD hich constitutes part of the nation"s )ross domestic product.

ANS: 4 PS: 1

!8. A positi$e balance on the )oods-and-ser$ices account of the balance of payments indicates an e%cessof e%ports o$er imports hich must be added to the nation"s )ross domestic product.

ANS: PS: 1

!1. 4or the United States, merchandise trade has )enerally constituted the lar)est portion of its )oods-and-ser$ices account.

ANS: PS: 1

!!. Unilateral transfers refer to to-sided transactions, reflectin) the mo$ement of )oods and ser$ices inone direction ith correspondin) payments in the other direction.

ANS: 4 PS: 1

!'. Unilateral transfers consist of pri$ate-sector transfers, such as church contributions to alle$iatestar$ation in Africa, as ell as )o$ernmental transfers, such as forei)n aid.

ANS: PS: 1


14/18

!. Current-account transactions include direct forei)n in$estment, purchases of forei)n )o$ernmentsecurities, and commercial ban/ loans made abroad.

ANS: 4 PS: 1

!. On the U.S. balance-of-payments statement, a capital inflo ould occur if a Siss resident purchasesthe securities of the U.S. )o$ernment.

ANS: PS: 1

!3. #f oyota #nc. of >apan builds an automobile assembly plant in the United States, the >apanese capitalaccount ould re)ister an outflo.

ANS: PS: 1

!5. #f &an/ of America recei$es repayment for a loan it made to a +e%ican firm, the U.S. capital accountould re)ister an inflo.

ANS: PS: 1

!. On the balance-of-payments statement, a capital inflo can be li/ened to the import of )oods andser$ices.

ANS: 4 PS: 1

!=. he capital account of the balance of payments includes pri$ate-sector transactions as ell as official-settlements transactions of the home country"s central ban/.

ANS: PS: 1

'8. #f the current account of the balance of payments re)isters a deficit, the capital account re)isters asurplus, and $ice $ersa.

ANS: PS: 1

'1. Concernin) the balance of payments, a current-account surplus means an e%cess of e%ports o$erimports of )oods, ser$ices, in$estment income, and unilateral transfers.

ANS: PS: 1

'!. #f a country reali0es a current-account deficit in its balance of payments, it becomes a net supplier offunds to the rest of the orld.

ANS: 4 PS: 1

''. Concernin) the balance of payments, a current-account deficit results in a orsenin) of a country"s netforei)n in$estment position.

ANS: PS: 1


15/18

'. #n the balance-of-payments statement, statistical discrepancy is treated as part of the merchandise tradeaccount because merchandise transactions are )enerally the most fre;uent source of error.

ANS: 4 PS: 1

'. &ecause a lar)e number of international transactions fail to )et recorded, statisticians insert a residual,/non as statistical discrepancy, to ensure that total debits e;ual total credits.

ANS: PS: 1

'3. Concernin) the balance of payments, the )oods-and-ser$ices balance is commonly referred to as theDtrade balanceD by the nes media.

ANS: PS: 1

'5. Since the 1=58s, the merchandise trade account of the U.S. balance of payments has re)istered deficit.

ANS: PS: 1

'. Althou)h the United States has reali0ed merchandise trade deficits since the early 1=58s, its )oods-

and-ser$ices balance has alays re)istered surplus.

ANS: 4 PS: 1

'=. #n the past to decades, the U.S. ser$ices balance has )enerally re)istered surplus.

ANS: PS: 1

8. he U.S. unilateral-transfers balance has consistently re)istered surplus in the past to decades.

ANS: 4 PS: 1

1. &ecause the balance of payments is a record of the economic transactions of a country o$er a period oftime, it is a DfloD concept.

ANS: PS: 1

!. he United States ould be a Dnet creditorD if the $alue of U.S. assets abroad e%ceeded the $alue offorei)n assets in the United States.

ANS: PS: 1

'. #f a country consistently reali0es a current-account surplus in its balance of payments, it li/ely ill

become a Dnet debtorD in its balance of international indebtedness.

ANS: 4 PS: 1

. &y the mid-1=8s, the United States had e$ol$ed from the status of a net-creditor nation to a net-debtor nation in its balance of international indebtedness.

ANS: PS: 1


16/18

. he net-debtor status, that the United States achie$ed in its balance of international indebtedness bythe mid-1=8s, reflected the continuous current-account surplus that the United States attained in itsbalance of payments durin) the 1=58s.

ANS: 4 PS: 1

3. Althou)h a net-debtor country may initially benefit from an inflo of sa$in)s from abroad, o$er thelon) run continued borroin) results in )roin) di$idend payments to forei)ners and a drain on thedebtor-country"s economic resources.

ANS: PS: 1

5. he official reser$e assets of the United States consist of holdin)s of )old and forei)n corporatesecurities.

ANS: 4 PS: 1

. hat U.S. importers purchase bananas from &ra0il constitutes a debit transaction on the U.S. balanceof payments.

ANS: PS: 1

=. hat 2erman in$estors collect interest income on their holdin)s of U.S. reasury bills constitutes acredit transaction on the U.S. balance of payments.

ANS: 4 PS: 1

8. hat U.S. charities donate funds to combat star$ation in Africa constitutes a debit transaction on theU.S. balance of payments.

ANS: PS: 1

1. o reduce a current account deficit, a country should either decrease the bud)et deficit of its)o$ernment or reduce in$estment spendin) relati$e to sa$in).

ANS: PS: 1

!. +ost economists belief that in the 1=8s, a massi$e outflo of capital caused a current account deficitfor the United States.

ANS: 4 PS: 1

'. A current account deficit for the United States necessarily reduces the standard of li$in) for American

households.

ANS: 4 PS: 1

. 9apid )roth of production and employment is commonly associated ith lar)e or )roin) tradesurpluses and current account surpluses.

ANS: 4 PS: 1


17/18

. Often, countries reali0in) rapid economic )roth rates possess lon)-run current account deficits.

ANS: PS: 1

3. 4or the United States, a conse;uence of its current account deficit is a )roin) forei)n onership ofthe capital stoc/ of the United States and a risin) fraction of U.S. income that must be di$erted abroadin the form of interest and di$idends to forei)ners.

ANS: PS: 1

5. +ost economists contend that any reduction in the current account deficit is better achie$ed throu)hincreased national sa$in) than throu)h reduced domestic in$estment.

ANS: PS: 1

SHORT ANS*ER

1. (hat are the components of the current account of the balance of payments*

ANS:

he current account includes transactions in )oods and ser$ices, income flos, and unilateral transfers.

PS: 1

!. Concernin) the balance of international indebtedness, hen is a country a net creditor or a net debtor*

ANS:A country is a net creditor hen its claims on forei)n nations e%ceed forei)n claims on it. he nation isa net debtor hen forei)n nations" claims on it e%ceed its claims on forei)n nations.

PS: 1

ESSAY

1. Eo do e measure the international in$estment position of the United States at any point in time*Eo did the U.S. become a net debtor nation so rapidly*

ANS:he international in$estment position of the United States is measured by the monetary $alue of U.S.assets abroad $ersus forei)n assets in the United States. Unli/e the balance of payments, hich is aflo concept, the balance of international indebtedness is a stoc/ concept. he reason for the U.S.becomin) a net debtor nation is that forei)n in$estors ha$e placed more funds in the United States thanthe U.S. residents ha$e in$ested abroad. he United States has been considered attracti$e to forei)nin$estors.

PS: 1

!. (hat does a current account deficit mean*

ANS:


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(hen a country reali0es a deficit in its current account, it has an e%cess of imports o$er e%ports of)oods, ser$ices, income, and unilateral transfers. his leads to an increase in net forei)n claims uponthe home country. he home country becomes a net demander of funds from abroad, the demand bein)met throu)h borroin) from other countries or li;uidatin) forei)n assets. he result is a orsenin) ofthe home country"s net forei)n in$estment position.

PS: 1

Ch10 International econ 13th edition

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Transcript of Ch10 International econ 13th edition