Deck 4: The Balance of Payments

Question 1

Which of the following is NOT an example of an exchange of financial assets?

A) the exchange of travel services
B) the exchange of stocks
C) the exchange of bonds
D) loans

Answer 1

the exchange of travel services

Question 2

The balance of payments

A) determines the eligibility of countries for IMF aid.
B) adds up the value of all assets and liabilities of a country on a specific date.
C) records all international transactions for a country over a period of time.
D) all of the above.

Answer 2

records all international transactions for a country over a period of time.

Question 3

Which of the following is NOT a part of the Current Account of BOP?

A) net export/import of goods
B) Balance of Trade
C) net portfolio investment
D) net export/import of services

Answer 3

net portfolio investment

Question 4

Because current and financial/capital account balances use double-entry book keeping it is unusual to find serious discrepancies in the debits and credits.

Question 5

Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of ________.

A) services trade
B) income trade
C) goods trade
D) current transfers

Question 6

According to the authors, the following types of transactions dominate the balance of payments:

A) the exchange of guns for butter.
B) the exchange of stocks and bonds.
C) the exchange of goods and services.
D) the exchange of real and financial assets.

Question 7

Balance of payment (BOP) data may be important for any of the following reasons:

A) BOP data helps to forecast a country's market potential, especially in the short run.
B) The BOP is an important indicator of a country's foreign exchange rate.
C) Changes in a country's BOP may signal a change in controls over payment of dividends and interest.
D) All of the above.

Question 8

The BOP must be in balance but the current account need not be.

Question 9

The travel services provided to international travelers by United Airlines would be recorded in the current account subcategory of ________.

A) services trade
B) income trade
C) goods trade
D) current transfers

Question 10

If your company were to import and export textiles, the transactions would be recorded in the current account subcategory of ________.

A) services trade
B) income trade
C) goods trade
D) current transfers

Question 11

Which of the following would NOT be considered a typical BOP transaction?

A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent company.
B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich.
C) A U.S. tourist purchases gifts at a museum in London.
D) All are example of BOP transactions.

Question 12

The balance of payments is most like a(an) ________.

A) cash flow statement
B) balance sheet
C) income statement
D) proxy statement

Question 13

The balance of payments as applied to a course in international finance may be defined as

A) the amount still owed by an exporting firm after making an initial down payment.
B) the amount still owed by governments to the International Monetary Fund.
C) the measurement of all international economic transactions between the residents of a country and foreign residents.
D) the amount of a country's merchandise trade deficit or surplus.

Question 14

The authors identify a tip for understanding BOP accounting. They recommend that you "follow the cash flow."

Question 15

Which of the following is NOT an item to be considered in BOP calculations?

A) A foreign resident purchases a U.S. Treasury Bill.
B) A U.S.-based firm manages the development of an oil field in Kazakhstan.
C) A consumer buys a VCR made in Korea from a Wal-Mart store.
D) A U.S. citizen living in Minnesota travels to Winnipeg, Canada and buys a case of LaBatt's Canadian beer.

Question 16

Which of the following is NOT part of the balance of payments account?

A) the current account
B) the financial/capital account
C) the official reserves account
D) All of the above are BOP accounts.

Question 17

Which of the following is NOT part of the Financial Account of the BOP?

A) net foreign direct investment.
B) net import/export of services
C) net portfolio investment
D) other Financial items

Question 18

A country experiencing a serious BOP ________ is more likely to ________ exports than otherwise.

A) surplus; contract
B) deficit; contract
C) deficit; expand
D) none of the above

Question 19

The ________ includes all international economic transactions with income or payment flows occurring within the year.

A) capital account
B) current account
C) financial account
D) IMF account

Question 20

Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored into BOP calculations.

Question 21

Portfolio investment is capital invested in activities that are ________ rather than made for ________.

A) short term; the long term
B) long term; profit
C) profit motivated; control
D) control motivated; profit

Question 22

The ________ of the balance of payments measures all international economic transactions of financial assets.

A) current account
B) merchandise trade account
C) services account
D) capital/financial account

Question 23

International debt security purchases and sales are defined as portfolio investments for financial account purposes because by definition debt securities do not provide the buyer with ownership or control.

Question 24

The subcategory that typically dominates the current account is ________.

A) goods (merchandise) trade
B) services trade
C) income trade
D) transfer accounts

Question 25

In 2001 the United States posted a current account deficit of -$393 billion. The bulk of the negative value came from

A) a net transfer deficit.
B) an income balance deficit.
C) a goods trade deficit.
D) an income trade deficit.

Question 26

In general, a country's exports decrease as foreign income decreases.

Question 27

Significant amounts of United States Treasury issues are purchased by foreign investors, therefore the U.S. must earn foreign currency to repay this debt.

Question 28

The two major concerns about foreign direct investment are

A) national defense and taxes.
B) who controls the assets and who receives the profits.
C) who receives the profits and taxes.
D) who pays the taxes and who receives the taxes.

Question 29

In general there is consensus that ________ should be free but there is no such consensus that ________ should be free.

A) international investment; international goods trade
B) international investment; international trade
C) international trade; international goods trade
D) international trade; international investment

Question 30

The financial account consists COMPLETELY of which three components?

A) stock investment, bond investment, and mutual fund investment
B) direct investment, stock investment, and bond investment
C) direct investment, portfolio investment, and other asset investment
D) mutual fund investment, portfolio investment, and stock investment

Question 31

The role of official reserves is ________ under a ________ exchange rate regime.

A) enhanced; floating
B) diminished; fixed
C) enhanced; fixed
D) None of the above apply.

Question 32

Under an international regime of fixed exchange rates, countries with a BOP ________ should consider ________ their currency while countries with a BOP ________ should consider ________ their currency.

A) deficit; revaluing; surplus; revaluing
B) deficit; devaluing; surplus; devaluing
C) surplus; devaluing; deficit; revaluing
D) surplus; revaluing; deficit; devaluing

Question 33

Most U.S. debt purchased by foreigners is denominated in ________ and most foreign debt issued by countries such as Russia, Mexico, and Brazil is issued in ________.

A) U.S. dollars; the purchasing investor's domestic currency
B) the purchasing investor's domestic currency; the issuing country's domestic currency
C) U.S. dollars; the issuing country's domestic currency
D) U.S. dollars; U.S. dollars

Question 34

If most major economies are operating under a regime of fixed exchange rates, then a ________ in a country's balance of payments suggests that the country should ________ its currency.

A) surplus; revalue
B) surplus; devalue
C) deficit; revalue
D) all of the above

Question 35

In general, as a country's income increases, so does the demand for imports.

Question 36

Over the last two decades the surplus on U.S. services trade has typically been ________ the deficit on U.S. goods trade.

A) greater than
B) equal to
C) less than
D) The relationship is constantly shifting from greater than to less than.

Question 37

When categorizing investments for the financial account component of the balance of payments the ________ is an investment where the investor has no control whereas the ________ is an investment where the investor has control over the asset.

A) direct investment; portfolio investment
B) direct investment; indirect investment
C) portfolio investment; indirect investment
D) portfolio investment; direct investment

Question 38

Over the last several years, the United States has run a ________ in the goods trade balance and a ________ in the services trade balance.

A) surplus; deficit
B) surplus; surplus
C) deficit; deficit
D) deficit; surplus

Question 39

Which of the following would NOT be considered a direct investment either into or from the United States?

A) the purchase of U.S. Treasury (debt) securities
B) Ford Motor Company building an assembly plant in Mexico
C) Honda of Japan building a manufacturing plant in Alabama
D) intel purchasing a chip manufacturing plant in Thailand

Question 40

In general, the United States goods trade balance has grown increasingly positive over the last 3 years.

Question 41

The J-curve adjustment path for trade balance adjustments assumes that ________ products are predominantly priced in the domestic currency and that ________ products are predominantly priced in the foreign currency

A) import; import
B) import; export
C) export; export
D) export; import

Question 42

The United States experienced a balance of trade ________ during the 1980s and a balance of trade ________ during the 1990s.

A) surplus; surplus
B) surplus; deficit
C) deficit; deficit
D) deficit; surplus

Question 43

Which of the following is not a component of the financial accounts?

A) direct investment abroad
B) direct investment domestic
C) goods imports
D) portfolio investment

Question 44

Which of the following statements about the balance of payments is not true?

A) The BOP is the summary statement of all international transactions between one country and all other countries.
B) The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year.
C) Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flows.
D) All of the above are true.

Question 45

Which of the following does NOT represent a possible mechanism by which capital can be moved from country to country?

A) transfers via the usual international payments mechanism such as regular bank transfers
B) transfers via a physical bearer such as smuggling
C) the transfer of cash into collectibles
D) All of the above are mechanisms for moving capital from country to country.

Question 46

The immediate impact on the balance of trade (BOT) for a country in deficit when there is an immediate devaluation of it's currency is likely to be an even larger BOT deficit than prior to devaluation.

Question 47

The beauty of the J-curve adjustment path for trade balance adjustments is that the process is very quick, typically taking only a month or so to complete.

Question 48

The time from 1971 to today has predominately used a regime of variable exchange rates. It has also seen a decrease in capital mobility.

Question 49

________ is an entry in the balance of payments measuring the difference between the monetary value of merchandise exports and merchandise imports.

A) Balance of payments
B) Balance of trade
C) Import-export spread
D) None of the above

Question 50

Which of the following is the best definition of money laundering?

A) legal transfer of funds through the usual international payments mechanisms
B) the transfer of cash into collectibles that are then transferred across borders
C) the cross-border purchase of assets that are then managed in a way that hide the movement of money and its ownership
D) False invoicing of international trade transactions

Question 51

The largest single component of the United States current account is ________.

A) current transfers
B) income payments and receipts
C) goods (merchandise) imports and exports
D) services imports and exports

Question 52

The era between 1880 and 1914, when the gold standard was in use, was characterized by increasing capital mobility.

Question 53

Assume that a country is experiencing a balance of trade deficit and then suffers a rapid depreciation of it's currency. J-curve theory suggests that the trade balance will adjust in three distinct periods in the following order:

A) quantity adjustment period; pass-through period; currency contract period
B) pass-through period; currency contract period; quantity adjustment period
C) currency contract period; pass-through period; quantity adjustment period
D) pass-through period; quantity adjustment period; currency contract period

Question 54

Portfolio investments are transactions that involve long-term financial assets and affect the transfer of control.

Question 55

An excess of merchandise exports over merchandise imports results in a balance of trade deficit.

Question 56

It is possible that the J-curve path for BOT adjustments may be be elongated or even inapplicable if exports are NOT predominately priced in the domestic currency and/or imports are NOT predominately priced in the foreign currency.

Question 57

The BOP should always balance.

Question 58

The ________ is the difference between merchandise imports and exports and a measure of a country's international trade in goods and services.

A) balance of payments
B) current account
C) capital account
D) balance of trade

Question 59

The United States, as of May 2007, had the largest official foreign exchange reserves of any nation.

Question 60

The J-curve adjustment path for trade balance adjustments assumes that export products are predominantly priced in the ________ currency and that import products are predominantly priced in the ________ currency.

A) domestic; domestic
B) domestic; foreign
C) foreign; foreign
D) foreign; domestic

Question 61

China, as of May 2007, had the largest official foreign exchange reserves of any nation.

Question 62

What is a country's balance of (merchandise) trade and why is it so widely reported in the financial and popular press?

Question 63

What is the Official Reserves Account (ORA) and why is it more important for countries under a fixed exchange rate regime than for ones under a floating exchange rate regime?