Deck 4: The Balance of Payments

Question 1

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.

Answer 1

All of the above are BOP accounts.

Question 2

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

Answer 2

The balance of trade (BOT)is the largest and most important subset of a country's current account. It measures the difference in a country's imports and exports over a specified time period. It is often reported because it is intuitively easy to understand (i.e., we either sell more or buy more from foreign countries)and it is a reasonable representation of the total current account balance. (For example, for the U.S. the BOT was -$343B in 1999 while the current account balance was -$331B.

Question 3

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.

Answer 3

the measurement of all international economic transactions between the residents of a country and foreign residents.

Question 4

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 5

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 6

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 7

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 8

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

A)Purchase of a U.S. Treasury Bill by a foreign resident.
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 Florida 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 9

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

A)True
B)False

Question 10

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 11

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

Question 12

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

A)True
B)False

Question 13

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?

Question 14

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

A)True
B)False

Question 15

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.

Question 16

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 17

Which of the following is NOT a major subaccount of the Balance of Payments?

A)The financial account.
B)The accounts payable.
C)The capital account.
D)The current account.

Question 18

When the world went to a system of floating exchange rates, the Balance of Payments became a relic of a system of fixed exchange rates and is no longer watched by serious economic groups.

Question 19

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 20

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

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

Question 21

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 22

Use the following terms for this question: C = consumption
I = capital investment spending
G = government spending
X = exports of goods and services
M = imports of goods and services
BOP = balance of payments
GDP = gross domestic product
NPV = net present value
INF = inflation
R = real rate of return
The static equation for the nations GDP is:

A)GDP = C + I + G + (X + M )x INF
B)GDP = C + I + G + X + M
C)GDP = C + I + G + X - M
D)GDP = C + I + X - M + R

Question 23

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 24

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 25

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 26

In 2007 the United States posted a current account deficit of -$731 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 27

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

A)True
B)False

Question 28

Imports have the potential to lower a country's inflation rate because of each of the following EXCEPT:

A)the import of lower priced goods limits what domestic competitors can charge for goods.
B)the import of lower priced services limits what domestic competitors can charge for services.
C)the higher prices of foreign goods spurs domestic competitors to cut prices.
D)of all of the above

Question 29

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 30

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 31

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 32

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

A)True
B)False

Question 33

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 34

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 35

The BOP should always balance.

A)True
B)False

Question 36

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.

A)True
B)False

Question 37

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

A)True
B)False

Question 38

The subcategory that typically dominates the current account is ________.

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

Question 39

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

A)True
B)False

Question 40

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 41

An increase in GDP should lead to a decrease in imports.

Question 42

The authors identify four distinct periods of capital mobility since 1860. Which do they term as a "period of global economic destruction"?

A)1860 - 1914
B)1914 - 1945
C)1945 - 1971
D)1971 - 2007

Question 43

Of the following, which is NOT a part of J-Curve adjustment path?

A)The currency contract period.
B)The exchange rate pass-through period.
C)The quantity adjustment period.
D)Each of the above is part of the J-Curve adjustment path.

Question 44

The effect of an imbalance in the BOP is the same for countries on a fixed exchange rate regime as for those on a floating exchange rate regime.

Question 45

The Bretton Woods era realized a great expansion of international trade in goods and services.

Question 46

When a currency is devalued the immediate impact may be an increase in a country's trade deficit. However, this situation tend to correct itself in 2 to 5 weeks..

Question 47

Under a floating exchange rate system, the government bears the responsibility to ensure that the BOP is near zero.

Question 48

Which of the following is NOT likely to occur in the quantity adjustment phase of the J-Curve adjustment path ?

A)Imports become relatively more expensive.
B)Exports become relatively less expensive.
C)The balance of trade gets worse.
D)All of the above are true.

Question 49

________ is the cross-border purchase of assets that are then managed in a way that hides the movement of money and its ownership.

A)Capital flight
B)Capital mobility
C)Irrational exuberance
D)Money laundering