Deck 3: The Balance of Payments

Question 1

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

Answer 1

True

Question 2

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 2

net portfolio investment

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

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 7

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 8

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 9

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 10

Which of the following could be considered a typical BOP transaction?

A) An American tourist purchases a hotel room in Guanajuato, Mexico.
B) Mountaineers from Colorado, USA, pay for guides for their assent of Mt. Everest.
C) General Electric Inc. pays for a new manufacturing facility in Chile.
D) All of the above are BOP transactions.

Question 11

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

Question 12

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 13

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 14

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 15

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 16

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 17

The balance of payments is most like a(an)

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

Question 18

Assume 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 19

The subcategory that typically dominates the current account is

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

Question 20

Two types of business transactions dominate the balance of payments. Which of the following is NOT such a transaction?

A) the exchange of real assets and financial assets
B) the exchange of real assets and political contributions
C) the exchange of goods and services and financial transactions such as loans
D) All of the above are business transactions.

Question 21

The United States experienced a balance of trade ________ during the 1990s and a balance of trade ________ during the 2000s.

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

Question 22

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 23

China holds a massive amount of foreign exchange reserves. As of 2010 they held nearly $2,500 billion. This huge foreign exchange reserve should allow China to

A) manage the value of the Chinese yuan to maintain competitiveness in world markets.
B) maintain a relatively stable managed fixed exchange rate for the yuan for years to come.
C) remain a very important player in world trade for at least the next several years.
D) All of the above.

Question 24

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 25

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 26

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 27

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 28

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 29

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 30

Ordinarily countries will demonstrate an inverse relationship between their current and financial accounts. A surplus in one will usually result in a deficit in the other.

Question 31

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 32

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 33

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 34

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 35

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

Question 36

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

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

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 39

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 40

China's "double surplus" in the current account and the financial account is typical for large economies in the modern era.

Question 41

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

Question 42

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 43

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 44

Assume that a country is experiencing a balance of trade deficit and then suffers a rapid depreciation of its 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 45

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 46

Your authors identify five primary mechanisms by which capital may be moved from one country to another. Identify and briefly explain/define three of those methods.

Question 47

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

Question 48

________ has increasingly focused on cost reduction through imports from less costly (lower wage) foreign locations.

A) Exchange rate management
B) Inflation rate management
C) Supply chain management
D) Interest rate management

Question 49

A positive current account balance (surplus) contributes directly to increasing the measure of GDP.

Question 50

Identify and explain the three stages of the J-curve adjustment path of the trade balance adjustment process.

Question 51

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 52

It is possible that the J-curve path for BOT adjustments may 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 53

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 54

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 55

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

Question 56

In a static (accounting) sense, a nation's GDP can be represented by the following equation: where C = consumption spending, I = investment spending, G = government spending, X = exports of goods and services, and M = imports of goods and services.

A) GDP = C + I + G + M - X
B) GDP = C + I + G + X - M
C) GDP = C + I - G + X - M
D) GDP = C + I + G + X + M

Question 57

Construct, in a static (accounting) form the equation for a nations GDP as presented by the authors. Identify each term (e.g., r = interest rate). How does a positive BOP account balance affect a country's GDP?