Deck 3: The Balance of Payments

Question 1

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 1

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

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

An American tourist purchases a leather jacket while in Italy.Which of the following statements is true?

A)The leather purchase would be considered an import for the U.S.BOP.
B)This transaction would be properly accounted for in the Current Account of the U.S.BOP.
C)The leather purchase is considered an import of a good,and thus,considered part of the balance of trade as well.
D)All of these statements are true.

Question 6

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

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 choices provided above

Question 8

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 9

Like a balance sheet,the Balance of Payments adds up the value of all assets and liabilities of a country on a specific date.

Question 10

Which of the following international transactions would NOT be counted as a balance of payments (BOP)transaction?

A)An American tourist purchases cheese in Milwaukee,Wisconsin.
B)The U.S.subsidiary of a British firm pays profits (dividends)back to its parent firm in London.
C)A Canadian lumber baron purchases a U.S.corporate bond through an investment broker in Seattle.
D)All of the above are considered BOP transactions.

Question 11

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

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

Question 12

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

Question 13

A country experiencing a serious trade deficit is not as likely to expand imports as it would be if running a surplus.

Question 14

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 15

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 16

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 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 17

Changes in the BOP may predict the imposition or removal of foreign exchange controls.

Question 18

The BOP should always balance.

Question 19

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 20

The measurement of all international economic transactions that take place between the residents of a country and foreign residents is called the balance of payments (BOP).List and explain three reasons why host-country BOP data is important to managers and investors.

Question 21

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 22

The financial account consists COMPLETELY of which four components?

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

Question 23

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 24

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 25

China is currently experiencing a surplus in its current account and its capital/financial accounts.Which of the following is NOT a contributing factor for this unusual situation?

A)The exceptional growth in the Chinese economy contributes to the current account surplus.
B)The positive prospects for China's continued growth contribute to the capital/financial account surplus.
C)China's inevitable acquisition of Taiwan is driving the market for Chinese investment.
D)All of the above are contributing factors for China's twins surpluses.

Question 26

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 27

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 28

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 29

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 30

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 31

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 32

If China wished to reduce their accumulation of foreign exchange reserves they could:

A)allow their currency,the yuan,to float freely in the market place.
B)reduce their current account surplus by importing more goods than they export.
C)undertake both of the activities identified in choices A and B.
D)dig a big hole and bury the reserves.

Question 33

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 34

In 2010 the United States posted a current account deficit of -$471 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 35

The subcategory that typically dominates the current account is:

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

Question 36

Consider the following: A foreign automobile company builds a manufacturing plant in Tennessee and European investors buy U.S.Treasury Bonds.

A)Both activities would be considered direct investment.
B)Both activities would be considered portfolio investment.
C)The auto manufacturer in engaging in portfolio investment,and the European investors are engaged in direct investing.
D)The auto manufacturer in engaging in direct investment,and the European investors are engaged in portfolio investing.

Question 37

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 and financial accounts

Question 38

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 39

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 40

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 41

The biggest problem that China faces in maintaining a stable value for their currency,the yuan,is their lack of foreign exchange reserves.

Question 42

Under a fixed exchange rate system,the government bears the responsibility to ensure that the BOP is near zero.If the sum of the current and capital accounts do not approximate zero,the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves.If the sum of the first two accounts is GREATER THAN ZERO,a ________ demand for the domestic currency exists in the world.To preserve the fixed exchange rate,the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

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

Question 43

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

Question 44

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)all of the above

Question 45

As of year-end 2010,the United States still held the world's largest foreign exchange reserve,but the total was rapidly being approached by China.

Question 46

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 47

China's current political plan includes reducing their foreign exchange reserve balance by allowing the yuan to float freely and by switching their goods balance from one of a net surplus to a net deficit.

Question 48

Expenditures by U.S.students abroad and foreign students pursuing studies in the United States would be considered a services trade and part of the U.S.current account.

Question 49

For at least the last decade,the United States has consistently run a surplus in services trade income.

Question 50

The transition to floating exchange rate regimes in the 1970s (described in Chapter 3)changed the focus from the total BOP to its various subaccount like the current and financial account balances.

Question 51

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 )× INF
B)GDP = C + I + G + X + M
C)GDP = C + I + G + X - M
D)GDP = C + I + X - M + R

Question 52

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

Question 53

In the United States and most developed countries,the current account and the combined financial/capital accounts tend to be inversely related in that when one is positive,the other tends to be negative.

Question 54

Use the following terms for this question: (X-M)= Current Account Balance
(CI-CO)= Capital Account Balance
(FI-FO)= Financial Account Balance
(I-S)= Investment-Saving Balance
FXB = Reserve Balance
BOP = balance of payments
GDP = gross domestic product
C = consumption
I = capital investment spending
G = government spending
The static equation for the BOP is:

A)BOP = (X-M)- (CI-CO)- (FI-FO)+ FXB
B)BOP = (X-M)+ (I-S)+ (FI-FO)+ FXB
C)BOP = (X-M)+ (CI-CO)+ (FI-FO)+ FXB
D)BOP = GDP - [C + I +G] + (FI-FO)

Question 55

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 56

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 57

Under a fixed exchange rate system,the government bears the responsibility to ensure that the BOP is near zero.If the sum of the current and capital accounts do not approximate zero,the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves.If the sum of the first two accounts is LESS THAN ZERO,a ________ demand for the domestic currency exists in the world.To preserve the fixed exchange rate,the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

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

Question 58

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

Question 59

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

Question 60

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 61

________ 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

Question 62

A ________ is any restriction that limits or alters the rate or direction of capital movement into or out of a country.

A)capital budget
B)capital control
C)balance of trade deficit
D)balance of trade surplus

Question 63

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 64

An era of retrenchment,in which major economic powers returned to policies of isolationism and protectionism,restricting trade and nearly eliminating capital mobility.

A)The Gold Standard,1860-1914
B)The Interwar Years ,1914-1945
C)The Bretton Woods Era,1945-1971
D)The Floating Era,1971-1997

Question 65

A country with a managed float that wishes to WEAKEN its currency may choose to raise domestic interest rates to attract additional capital from abroad.

Question 66

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 67

This was an era dominated by industrialized nation economies that were dependent on gold convertibility to maintain confidence in the system.

A)The Gold Standard,1860-1914
B)The Interwar Years ,1914-1945
C)The Bretton Woods Era,1945-1971
D)The Floating Era,1971-1997

Question 68

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

Question 69

A country's overall level of interest rates should have an impact on the financial account of the BOP.Relatively low real interest rates should normally stimulate an outflow of capital seeking higher interest rates in other country currencies.

Question 70

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 71

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 72

This dollar-based fixed exchange rate system gave rise to a long period of economic recovery and growing openness of both international trade and capital flows in and out of more and more countries.

A)The Gold Standard,1860-1914
B)The Interwar Years ,1914-1945
C)The Bretton Woods Era,1945-1971
D)The Floating Era,1971-1997

Question 73

The immediate impact of a devaluation of the domestic currency is to decrease the value of the spot exchange rate S^$/fc.

Question 74

Imports have the potential to lower a country's inflation rate.In particular,imports of HIGHER-priced goods and services place a limit on what domestic competitors charge for comparable goods and services.

Question 75

Countries occasionally intentionally devalue their currencies.So what is the logic and likely results of intentionally devaluing their domestic currency? International economic analysis characterizes the trade balance adjustment process as occurring in three stages.List and explain the three stages too.

Question 76

Capital controls may take a variety of forms EXCEPT:

A)currency boards
B)taxes
C)quotas
D)prohibitions

Question 77

Very often governments seek to alter the market's valuation of their currency by influencing relative interest rates,thus influencing the economic fundamentals of exchange rate determination rather than through direct intervention in the foreign exchange markets.Describe how this strategy works.Describe the case of the U.S.or China where the opposite effect,to the suggest here,have occurred.

Question 78

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

Question 79

Long-term capital flows reflect the following factors EXCEPT:

A)short term interest rate differentials
B)fundamental economic expectations
C)growth prospects
D)perceptions of political stability

Question 80

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