Deck 19: The Balance-Of-Payments Accounts

Question 1

"Since the statistical discrepancy in the U.S. balance-of-payments accounts is so large, we cannot rely on the U.S. BOP statement to give information on the size of various 'balances' with any precision. Perhaps the U.S. BOP statement is essentially useless." Discuss this statement.

Answer 1

not answered

Question 2

Suppose that, during 2012, country A had exports of goods of $50, imports of goods of $60, exports of services plus factor income receipts from abroad of $36, and imports Of services plus factor income payments abroad of $30. In addition, during 2007, country A made $15 of unilateral transfers abroad and received no unilateral transfers from Abroad. Given this information, country A's "balance on current account" in 2007 was

A) a $19 deficit.
B) a $10 deficit.
C) a $4 deficit.
D) a $6 surplus

Answer 2

a $19 deficit.

Question 3

If, in a country's balance of payments statement, the merchandise trade balance is $-100, services exports and factor income receipts from abroad in total exceed services imports and factor income payments abroad by $25, unilateral transfers made exceed unilateral transfers received by $15, and the long-term financial account has debits exceeding credits by $30, then the country's balance on current account is

A) $-120.
B) $-90.
C) $-75.
D) $-60.

Answer 3

B

Question 4

Suppose that a U.S. importer buys goods from a foreign firm and makes payment by drawing down its New York bank account and transferring the funds to the foreign exporter's bank account in the foreign country. In this situation, the credit entry in the U.S. balance of payments account is __________.

A) "decrease in U.S. short-term private assets abroad"
B) "increase in U.S. short-term private assets abroad"
C) "decrease in foreign short-term private assets in the United States"
D) "imports of goods"

Question 5

Which one of the following items would be a "debit" in a country's balance-of-payments account?

A) exports of merchandise
B) an increase in a domestic citizen's bank account in a foreign bank
C) increased holdings of domestic bonds by foreigners
D) exports of services

Question 6

Suppose that a U.S. exporter sells goods to a foreign firm and receives payment by the foreign firm drawing down its New York bank account and transferring the funds to the U.S. exporter's New York bank account. In this situation, the debit entry in the U.S. balance of payments account is _________.

A) "exports of goods"
B) "increase in foreign short-term private assets in the United States"
C) "decrease in foreign short-term private assets in the United States"
D) "increase in U.S. short-term private foreign assets abroad"

Question 7

For each of the statements below, explain why the statement is either TRUE or FALSE.
(a) "If a country's income is less than its spending, then the country will have a
surplus in its current account."
(b) "If a country has a merchandise trade deficit, then the country must also have a current account deficit."
(c) "If a country's balance on current account is a net debit of $5,000, then the country's capital/financial account balance (including all government capital/ financial flows as well as all private capital/financial flows) must show a net
capital/financial inflow of $5,000."
(d) "If country A makes a unilateral transfer of $1,000 of goods to country B,
then, in this time period and other things equal, country A's merchandise trade
balance will be $1,000 more positive than would otherwise have been the case.
However, country A's current account balance will be the same as would
otherwise have been the case."

Question 8

If a country has a current account deficit, which one of the following is true?

A) Y - (C + I + G) > 0
B) S + (G - T) - I < 0
C) S < I + (G - T)
D) C - Y > 0

Question 9

Which one of the following items is a "credit" item in a country's balance-of-payments accounts?

A) unilateral transfers received from another country
B) decrease in short-term home country assets owned by foreign private citizens
C) imports of goods
D) domestic purchase of a foreign corporation's bond

Question 10

When might a current account deficit be a reflection of the fact that "good things" are happening in the economy?

Question 11

If a country has a current account deficit, then the country must also have

A) a merchandise trade deficit.
B) a financial or capital account surplus.
C) a financial or capital account deficit.
D) an increase in its net international investment position.

Question 12

If a country has a current account deficit, this suggests that

A) the country's spending is less than its income.
B) the country must also have a negative merchandise trade balance.
C) the country's capital/financial account must also be in a deficit position.
D) the country's saving is less than its investment.

Question 13

If a U.K. citizen removes funds from a London bank and places them in his/her bank account in the United States, this deposit into the United States is recorded as a __________ item in the U.S. balance-of-payments accounts. If, in a different transaction, a U.K. firm sells a good to a U.S. citizen, this U.K. export (U.S. import) of the good is __________ item in the U.S. balance-of-payments accounts.

A) debit; also recorded as a debit
B) debit; recorded as a credit
C) credit; recorded as a debit
D) credit; also recorded as a credit

Question 14

Suppose that home country A has the following transactions with foreign countries (represented by foreign country B). For each transaction, indicate and explain the appropriate debit and credit entry in A's balance-of-payments accounts.
(a) A firm in country A sells $6,000 of steel to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank.
(b) Country A citizens give $1,000-worth of cash to country B relatives by writing checks on A-citizen bank accounts in country B.
(c) An importer in country A buys $8,000 of apparel from a country-B supplier, paying for the goods by writing a check to be deposited into the B firm's bank account in a country A bank.
(d) A citizen of country B buys a long-term bond of a company in country A. The buyer purchases the $5,000 bond by drawing down his/her checking deposit in a bank in A.
(e) A firm in country A purchases $3,000 of shipping services from a country B ocean freight carrier, paying for the services by drawing down bank deposits in B owned by the A firm.
(f) A's central bank buys $2,000-worth of foreign currency holdings held in a B commercial bank by an A citizen. The central bank adds the foreign currency to its own commercial bank account in country B.
Next, using the debit and credit entries that you have constructed, and assuming that these six transactions were the only international transactions during the time period, construct country A's balance-of-payments summary statement for the time period. Indicate the size for country A and explain the meaning of the "balance of trade," "balance on goods and services," "current account balance," "official reserve transactions balance," and "financial account balance."

Question 15

Suppose that country A's citizens, firms, and governments own $750 billion of assets in other countries and that foreign citizens, firms, and governments own $850 billion of assets in country A. This situation indicates that country A has a __________ of __________.

A) balance-of-payments deficit; $100 billion
B) balance-of-payments surplus; $100 billion
C) net international investment position; minus $100 billion
D) net international investment position; plus $100 billion

Question 16

Suppose that you had to explain to a person in the street (who is not an economist) why a current account deficit must be accompanied by a financial or capital account surplus. What would you say?

Question 17

Why might detailed information on the state of the balance of payments be useful to economists and to policymakers? Which of the five "balances" discussed in the text does the U.S. Department of Commerce not publish, and what case can be made for not publishing those balances? What case can be made that those balances should be published?

Question 18

Which one of the following "balances" in a balance-of-payments account has incorporated all private short-term asset changes before arriving at the measure of "balance?"

A) merchandise trade balance
B) balance on current account
C) balance on goods and services
D) official reserve transactions balance

Question 19

How is a country's net international investment position related to that country's balance- of-payments accounts? When might the net international investment position not change from the end of one year to the end of the next year? Explain.

Question 20

Identify and distinguish among, in balance-of-payments accounting, various "balances"that can appear in a country's balance-of-payments statement. What must conceptually be the numerical relationship between a country's "balance on current account" (or "current account balance") and its "capital/financial account balance?" Why? Then, for each of the two
statements below, explain why the statement is either True or False.
(a) "A rise in interest rates in a country, such as occurred in the United States
in the early 1980s, can lead to an increased deficit in the country's merchandise trade balance."
(b) "A decrease in saving by households in a country can lead to a deterioration in that country's balance on current account (i.e., can make the current account balance less positive or more negative)."

Question 21

In its international investment position in the 1980s, the United States moved from a position of a __________ at the beginning of the decade to that of a __________ at the End of the decade.

A) small "net debtor"; very large "net debtor"
B) "net debtor"; "net creditor"
C) large "net creditor"; small "net creditor"
D) "net creditor"; "net debtor"

Question 22

Which one of the following items would be classified as a "debit" in country A's balance-of-payments accounts?

A) the receipt of investment income from abroad by a country A corporation
B) an increase in the size of a bank account held in a country A bank by a country B Citizen
C) consulting services provided by a country A citizen to a country B firm
D) an increase in size of a bank account held in a country B bank by a country A Corporation

Question 23

Other things equal, an export of goods from the United States as a gift to foreigners would lead to an improvement in the U.S. __________ and to no change in the
__________.

A) merchandise trade balance; balance on current account
B) balance on current account; merchandise trade balance
C) financial account balance; merchandise trade balance
D) merchandise trade balance; balance on goods and services

Question 24

If we compile data on a country's exports and imports of goods and services, its unilateral transfers, and net factor income flows, the resulting net credit or net debit account would be called that country's

A) balance of trade.
B) balance on current account. .
C) financial account balance.
D) official reserve transactions balance

Question 25

The country/group of countries with which the United States has had the largest merchandise trade deficits in the last several years is __________.

A) Canada
B) China
C) Japan
D) the Organization of Petroleum Exporting Countries (OPEC)

Question 26

Suppose that a country A individual investor receives a dividend payment from an investment made abroad, and the payment is made by a deposit of funds into the investor's bank account in the country where the investment is made. The category for the credit entry in this situation would be __________, and the category for the debit entry would be __________.

A) "factor income received from abroad"; "increase in private short-term assets abroad"
B) "decrease in private short-term assets abroad"; "service exports"
C) "increase in private short-term assets abroad"; "factor income payment abroad"
D) "factor income received from abroad"; "decrease in short-term assets abroad"

Question 27

Suppose that a developing country receives foreign aid in the form of a shipment of wheat. Balance-of-payments accountants in that country would record the "debit" item in their accounts as __________ and the credit item as __________.

A) "exports of goods"; "unilateral transfers made"
B) "unilateral transfers received"; "imports of goods"
C) "imports of goods"; "unilateral transfers received"
D) "imports of goods"; "increase in short-term official assets" in the developing Country's banks

Question 28

In balance-of-payments accounting, the acquisition of a foreign production facility by a U.S. firm is a __________ item in the U.S. balance of payments; the deposit of funds in a Foreign bank account by a U.S. citizen __________ item in the U.S. balance of payments.

A) debit; also is a debit
B) debit; is a credit
C) credit; is a debit
D) credit; also is a credit

Question 29

If a U.S. citizen gives $1,000 to a French citizen by writing a check on a New York bank for deposit to the French citizen's New York bank account, the credit item in the U.S. balance-of-payments accounts is __________ and the debit item is __________.

A) "exports"; "unilateral transfers made"
B) "increase in foreign short-term private assets in the United States"; "exports"
C) "increase in foreign short-term private assets in the United States"; "unilateral Transfers made"
D) "unilateral transfers made"; "decrease in foreign short-term private assets in the United States"