CHAPTER 10—THE 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 PTS: 1

2. The balance of international indebtedness is a record of a country's international:

a. Investment position over a period of time
b. Investment position at a fixed point in time
c. Trade position over a period of time
d. Trade position at a fixed point in time
ANS: B PTS: 1

3. Which balance-of-payments item does not directly enter into the calculation of the U.S. gross domestic
product?
a. Merchandise imports
b. Shipping and transportation receipts
c. Direct foreign investment
d. Service exports
ANS: C PTS: 1

4. Which of the following is considered a capital inflow?

a. A sale of U.S. financial assets to a foreign buyer
b. A loan from a U.S. bank to a foreign borrower
c. A purchase of foreign financial assets by a U.S. buyer
d. A U.S. citizen's repayment of a loan from a foreign bank
ANS: A PTS: 1

5. Which of the following would call for inpayments to the United States?
a. American imports of German steel
b. Gold flowing out of the United States
c. American unilateral transfers to less-developed countries
d. American firms selling insurance to British shipping companies
ANS: D PTS: 1

6. In a country's balance of payments, which of the following transactions are debits?

a. Domestic bank balances owned by foreigners are decreased
b. Foreign bank balances owned by domestic residents are decreased
c. Assets owned by domestic residents are sold to nonresidents
d. Securities are sold by domestic residents to nonresidents

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 ANS: A PTS: 1

7. Which of the following is classified as a credit in the U.S. balance of payments?

a. U.S. exports
b. U.S. gifts to other countries
c. A flow of gold out of the U.S.
d. Foreign loans made by U.S. companies
ANS: A PTS: 1

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

Table 10.1. U.S. International Transactions

Amount
Transaction (billions of dollars)

Merchandise imports 110

Military transactions, net -5
Remittances, pensions, transfers -20
U.S. private assets abroad -50
Merchandise exports 115
Investment income, net 15
U.S. government grants -5
(excluding military)
Foreign private assets in the U.S. 25
Compensation of employees -5
Allocation of SDRs 5
Travel and transportation receipts, net 20

8. Referring to Table 10.1, the goods and services balance equals:

a. $5 billion
b. $15 billion
c. $20 billion
d. $25 billion
ANS: C PTS: 1

9. Referring to Table 10.1, the current account balance equals:

a. $5 billion
b. $10 billion
c. $15 billion
d. $20 billion
ANS: A PTS: 1

10. Unlike the balance of payments, the balance of international indebtedness indicates the international:
a. Investment position of a country at a given moment in time
b. Investment position of a country over a one-year period
c. Trade position of a country at a given moment in time

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 d. Trade position of a country over a one-year period
ANS: A PTS: 1

11. Which of the following indicates the international investment position of a country at a given moment
in time?
a. The balance of payments
b. The capital account of the balance of payments
c. The current account of the balance of payments
d. The balance of international indebtedness
ANS: D PTS: 1

12. Concerning the U.S. balance of payments, which account is defined in essentially the same way as the
net export of goods and services, which comprises part of the country's gross domestic product?
a. Merchandise trade account
b. Goods and services account
c. Current account
d. Capital account
ANS: B PTS: 1

13. If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a Japanese
firm, the transaction would 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: D PTS: 1

14. If the United States government sells military hardware to Saudi Arabia, the transaction would be
recorded 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
ANS: B PTS: 1

15. The U.S. balance of trade is determined by:

a. Exchange rates
b. Growth of economies overseas
c. Relative prices in world markets
d. All of the above
ANS: D PTS: 1

16. U.S. military aid granted to foreign countries is entered in the:

a. Merchandise trade account
b. Capital account

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 c. Current account
d. Official settlements account
ANS: C PTS: 1

17. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:
a. The official settlements account
b. The capital account
c. Either the official settlements account or the capital account
d. Both the official settlements account and the capital account
ANS: C PTS: 1

18. The current account of the U.S. balance of payments does not include:
a. Investment income
b. Merchandise exports and imports
c. The sale of securities to foreigners
d. Unilateral transfers
ANS: C PTS: 1

19. The U.S. has a balance of trade deficit when its:

a. Merchandise exports exceed its merchandise imports
b. Merchandise imports exceed its merchandise exports
c. Goods and services exports exceed its goods and services imports
d. Goods and services imports exceed its goods and services exports
ANS: B PTS: 1

20. The value to American residents of income earned from overseas investments shows up in which
account in the U.S. balance of payments?
a. Current account
b. Trade account
c. Unilateral transfers account
d. Capital account
ANS: A PTS: 1

Table 10.2. International Investment Position of the United States

U.S. assets abroad

U.S. government assets $800 billion
U.S. private assets $200 billion

Foreign assets in the U.S.

Foreign official assets $600 billion
Foreign private assets $300 billion

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21. Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United States is a
net:
a. Debtor
b. Creditor
c. Spender
d. Exporter
ANS: B PTS: 1

22. For the first time since World War I, in 1985 the United States became a net international:
a. Exporter
b. Importer
c. Debtor
d. Creditor
ANS: C PTS: 1

23. A country that is a net international debtor initially experiences:

a. An augmented savings pool available to finance domestic spending
b. A higher interest rate, which leads to lower domestic investment
c. A loss of funds to trading partners overseas
d. A decrease in its services exports to other countries
ANS: A PTS: 1

24. Credit (+) items in the balance of payments correspond to anything that:
a. Involves receipts from foreigners
b. Involves payments to foreigners
c. Decreases the domestic money supply
d. Increases the demand for foreign exchange
ANS: A PTS: 1

25. Debt (-) items in the balance of payments correspond to anything that:
a. Involves receipts from foreigners
b. Involves payments to foreigners
c. Increases the domestic money supply
d. Decreases the demand for foreign exchange
ANS: B PTS: 1

26. When all of the debit or credit items in the balance of payments are combined:
a. Merchandise imports equal merchandise exports
b. Capital imports equal capital exports
c. Services exports equal services imports
d. The total surplus or deficit equals zero
ANS: D PTS: 1

27. In the balance of payments, the statistical discrepancy is used to:

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 a. Ensure that the sum of all debits matches the sum of all credits
b. Ensure that trade imports equal the value of trade exports
c. Obtain an accurate account of a balance-of-payments deficit
d. Obtain an accurate account of a balance-of-payments surplus
ANS: A PTS: 1

28. All of the following are credit items in the balance of payments, except:
a. Investment inflows
b. Merchandise exports
c. Payments for American services to foreigners

d. Private gifts to foreign residents

ANS: D PTS: 1

29. All of the following are debit items in the balance of payments, except:
a. Capital outflows
b. Merchandise exports
c. Private gifts to foreigners
d. Foreign aid granted to other nations
ANS: B PTS: 1

30. The role of ____ is to direct one nation's savings into another nation's investments:
a. Merchandise trade flows
b. Services flows
c. Current account flows
d. Capital flows
ANS: D PTS: 1

31. When a country realizes a deficit on its current account:

a. Its net foreign investment position becomes positive
b. It becomes a net demander of funds from other countries
c. It realizes an excess of imports over exports on goods and services
d. It becomes a net supplier of funds to other countries
ANS: B PTS: 1

32. Reducing a current account deficit requires a country to:

a. Increase private saving relative to investment
b. Increase private consumption relative to saving
c. Increase private investment relative to consumption
d. Increase private investment relative to saving
ANS: A PTS: 1

33. Reducing a current account deficit requires a country to:

a. Increase the government's deficit and increase private investment relative to saving

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 b. Increase the government's deficit and decrease private investment relative to saving
c. Decrease the government's deficit increase private investment relative to saving
d. Decrease the government's deficit and decrease private investment relative to saving
ANS: D PTS: 1

34. Reducing a current account surplus requires a country to:

a. Increase the government's deficit and increase private investment relative to saving
b. Increase the government's deficit and decrease private investment relative to saving
c. Decrease the government's deficit and increase private investment relative to saving
d. Decrease the government's deficit and decrease private investment relative to saving
ANS: A PTS: 1

35. Concerning a country's business cycle, rapid growth of production and employment is commonly
associated with:
a. Large or growing trade deficits and current account deficits
b. Large or growing trade deficits and current account surpluses
c. Small or shrinking trade deficits and current account deficits
d. Small or shrinking trade deficits and current account surpluses
ANS: A PTS: 1

36. The burden of a current account deficit would be the least if a nation uses what it borrows to finance:
a. Unemployment compensation benefits
b. Social Security benefits
c. Expenditures on food and recreation
d. Investment on plant and equipment
ANS: D PTS: 1

37. Concerning a country's business cycle, ____ is commonly associated with large or growing current
account deficits:
a. Rapid growth rates of production and employment
b. Slow growth rates of production and employment
c. Falling interest rates on government securities
d. Falling interest rates on corporate securities
ANS: A PTS: 1

38. According to researchers at the Federal Reserve, the loss of jobs associated with a deficit in the current
account tends to be:
a. Offset by the increase of jobs associated with a surplus in the capital account
b. Reinforced by the decrease of jobs associated with a surplus in the capital account
c. A threat to the level of employment for the economy as a whole
d. Of no long-run economic consequence for workers who lose their jobs
ANS: A PTS: 1

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TRUE/FALSE

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

Table 10.3. International Transactions of the United States

Amount
Transaction (billions of dollars)

Allocation of SDRs 10
Changes in U.S. assets abroad 100
Statistical discrepancy -15
Merchandise imports -400
Payments on foreign assets in U.S. -20
Remittances, pensions, transfers -60
Travel and transportation receipts, net 30
Military transactions, net -10
Investment income, net 100
Merchandise exports 350
U.S. government grants (excluding military) -20
Changes in foreign assets in the U.S. 190
Other services, net 80
Receipts on U.S. investments abroad 30
Compensation of employees -10

1. Refer to Table 10.3. The merchandise-trade balance registered a deficit of $50 billion.

ANS: T PTS: 1

2. Refer to Table 10.3. The services balance registered a surplus of $100 billion.

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 ANS: T PTS: 1

3. Refer to Table 10.3. The goods-and-services balance registered a surplus of $50 billion.

ANS: T PTS: 1

4. Refer to Table 10.3. The unilateral-transfers balance registered a deficit of $40 billion.

ANS: F PTS: 1

5. Refer to Table 10.3. The current-account balance registered a surplus of $30 billion.

ANS: F PTS: 1

6. Refer to Table 10.3. The "net exports" component of the U.S. gross domestic product registered $-110
billion.

ANS: F PTS: 1

7. Refer to Table 10.3. The payments data suggest that the United States was a "net demander" of $30
billion from the rest of the world.

ANS: F PTS: 1

8. The balance of payments refers to the stock of trade and investment transactions that exists at a
particular point in time.

ANS: F PTS: 1

9. Referring to the balance-of-payments statement, an international transaction refers to the exchange of

goods, services, and assets between residents of one country and those abroad.

ANS: T PTS: 1

10. The balance of payments includes international transactions of households and businesses, but not
government.

ANS: F PTS: 1

11. Because the balance of payments utilizes double-entry accounting, merchandise exports will always be
in balance with merchandise imports.

ANS: F PTS: 1

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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
12. On the U.S. balance-of-payments statement, the following transactions are credits, leading to the
receipt of dollars from foreigners: merchandise exports, transportation receipts, income received from
investments abroad, and investments in the United States by foreign residents.

ANS: T PTS: 1

13. On the U.S. balance of payments, the following transactions are debits, leading to payments to
foreigners: merchandise imports, travel expenditures, gifts to foreign residents, and overseas
investments by U.S. residents.

ANS: T PTS: 1

14. The "goods and services" account of the balance of payments shows the monetary value of
international flows associated with transactions in goods, services, and unilateral transfers.

ANS: F PTS: 1

15. An increase in import restrictions by the U.S. government tends to promote a merchandise-trade
surplus.

ANS: T PTS: 1

16. Services transactions on Canada's balance-of-payments statement would include Canadian ships
transporting lumber to Japan, foreign tourists spending money in Canada, and Canadian engineers
designing bridges in China.

ANS: T PTS: 1

17. On the balance-of-payments statement, dividend and interest income are classified as capital-account
transactions.

ANS: F PTS: 1

18. A surplus on Germany's goods-and-services balance indicates that Germany has sold more goods and
services to foreigners than it has bought from them over a one-year period.

ANS: T PTS: 1

19. The merchandise-trade account on the balance-of-payments statement is defined the same way as "net
exports" which constitutes part of the nation's gross domestic product.

ANS: F PTS: 1

20. A positive balance on the goods-and-services account of the balance of payments indicates an excess
of exports over imports which must be added to the nation's gross domestic product.

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 ANS: T PTS: 1

21. For the United States, merchandise trade has generally constituted the largest portion of its goods-and-
services account.

ANS: T PTS: 1

22. Unilateral transfers refer to two-sided transactions, reflecting the movement of goods and services in
one direction with corresponding payments in the other direction.

ANS: F PTS: 1

23. Unilateral transfers consist of private-sector transfers, such as church contributions to alleviate
starvation in Africa, as well as governmental transfers, such as foreign aid.

ANS: T PTS: 1

24. Current-account transactions include direct foreign investment, purchases of foreign government
securities, and commercial bank loans made abroad.

ANS: F PTS: 1

25. On the U.S. balance-of-payments statement, a capital inflow would occur if a Swiss resident purchases
the securities of the U.S. government.

ANS: T PTS: 1

26. If Toyota Inc. of Japan builds an automobile assembly plant in the United States, the Japanese capital
account would register an outflow.

ANS: T PTS: 1

27. If Bank of America receives repayment for a loan it made to a Mexican firm, the U.S. capital account
would register an inflow.

ANS: T PTS: 1

28. On the balance-of-payments statement, a capital inflow can be likened to the import of goods and
services.

ANS: F PTS: 1

29. The capital account of the balance of payments includes private-sector transactions as well as official-
settlements transactions of the home country's central bank.

ANS: T PTS: 1

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30. If the current account of the balance of payments registers a deficit, the capital account registers a
surplus, and vice versa.

ANS: T PTS: 1

31. Concerning the balance of payments, a current-account surplus means an excess of exports over
imports of goods, services, investment income, and unilateral transfers.

ANS: T PTS: 1

32. If a country realizes a current-account deficit in its balance of payments, it becomes a net supplier of
funds to the rest of the world.

ANS: F PTS: 1

33. Concerning the balance of payments, a current-account deficit results in a worsening of a country's net
foreign investment position.

ANS: T PTS: 1

34. In the balance-of-payments statement, statistical discrepancy is treated as part of the merchandise trade
account because merchandise transactions are generally the most frequent source of error.

ANS: F PTS: 1

35. Because a large number of international transactions fail to get recorded, statisticians insert a residual,
known as statistical discrepancy, to ensure that total debits equal total credits.

ANS: T PTS: 1

36. Concerning the balance of payments, the goods-and-services balance is commonly referred to as the
"trade balance" by the news media.

ANS: T PTS: 1

37. Since the 1970s, the merchandise trade account of the U.S. balance of payments has registered deficit.

ANS: T PTS: 1

38. Although the United States has realized merchandise trade deficits since the early 1970s, its goods-
and-services balance has always registered surplus.

ANS: F PTS: 1

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39. In the past two decades, the U.S. services balance has generally registered surplus.

ANS: T PTS: 1

40. The U.S. unilateral-transfers balance has consistently registered surplus in the past two decades.

ANS: F PTS: 1

41. Because the balance of payments is a record of the economic transactions of a country over a period of
time, it is a "flow" concept.

ANS: T PTS: 1

42. The United States would be a "net creditor" if the value of U.S. assets abroad exceeded the value of
foreign assets in the United States.

ANS: T PTS: 1

43. If a country consistently realizes a current-account surplus in its balance of payments, it likely will
become a "net debtor" in its balance of international indebtedness.

ANS: F PTS: 1

44. By the mid-1980s, the United States had evolved from the status of a net-creditor nation to a net-
debtor nation in its balance of international indebtedness.

ANS: T PTS: 1

45. The net-debtor status, that the United States achieved in its balance of international indebtedness by
the mid-1980s, reflected the continuous current-account surplus that the United States attained in its
balance of payments during the 1970s.

ANS: F PTS: 1

46. Although a net-debtor country may initially benefit from an inflow of savings from abroad, over the
long run continued borrowing results in growing dividend payments to foreigners and a drain on the
debtor-country's economic resources.

ANS: T PTS: 1

47. The official reserve assets of the United States consist of holdings of gold and foreign corporate
securities.

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 ANS: F PTS: 1

48. That U.S. importers purchase bananas from Brazil constitutes a debit transaction on the U.S. balance
of payments.

ANS: T PTS: 1

49. That German investors collect interest income on their holdings of U.S. Treasury bills constitutes a
credit transaction on the U.S. balance of payments.

ANS: F PTS: 1

50. That U.S. charities donate funds to combat starvation in Africa constitutes a debit transaction on the
U.S. balance of payments.

ANS: T PTS: 1

51. To reduce a current account deficit, a country should either decrease the budget deficit of its
government or reduce investment spending relative to saving.

ANS: T PTS: 1

52. Most economists belief that in the 1980s, a massive outflow of capital caused a current account deficit
for the United States.

ANS: F PTS: 1

53. A current account deficit for the United States necessarily reduces the standard of living for American
households.

ANS: F PTS: 1

54. Rapid growth of production and employment is commonly associated with large or growing trade
surpluses and current account surpluses.

ANS: F PTS: 1

55. Often, countries realizing rapid economic growth rates possess long-run current account deficits.

ANS: T PTS: 1

56. For the United States, a consequence of its current account deficit is a growing foreign ownership of
the capital stock of the United States and a rising fraction of U.S. income that must be diverted abroad
in the form of interest and dividends to foreigners.

ANS: T PTS: 1

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 57. Most economists contend that any reduction in the current account deficit is better achieved through
increased national saving than through reduced domestic investment.

ANS: T PTS: 1

SHORT ANSWER

1. What are the components of the current account of the balance of payments?

ANS:
The current account includes transactions in goods and services, income flows, and unilateral transfers.

PTS: 1

2. Concerning the balance of international indebtedness, when is a country a net creditor or a net debtor?

ANS:
A country is a net creditor when its claims on foreign nations exceed foreign claims on it. The nation is
a net debtor when foreign nations' claims on it exceed its claims on foreign nations.

PTS: 1

ESSAY

1. How do we measure the international investment position of the United States at any point in time?
How did the U.S. become a net debtor nation so rapidly?

ANS:
The international investment position of the United States is measured by the monetary value of U.S.
assets abroad versus foreign assets in the United States. Unlike the balance of payments, which is a
flow concept, the balance of international indebtedness is a stock concept. The reason for the U.S.
becoming a net debtor nation is that foreign investors have placed more funds in the United States than
the U.S. residents have invested abroad. The United States has been considered attractive to foreign
investors.

PTS: 1

2. What does a current account deficit mean?

ANS:

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When a country realizes a deficit in its current account, it has an excess of imports over exports of
goods, services, income, and unilateral transfers. This leads to an increase in net foreign claims upon
the home country. The home country becomes a net demander of funds from abroad, the demand being
met through borrowing from other countries or liquidating foreign assets. The result is a worsening of
the home country's net foreign investment position.

PTS: 1

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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.