Deck 9: Trade and the Balance of Payments

Question 1

Direct foreign investment items have more liquidity than foreign portfolio investment items.

Answer 1

False

Question 2

Table 9.1

Based on Table 9.1,if the information in the table is typical of current and financial account values over a long period,then it would be reasonable to infer that

A)the net international investment position is negative.
B)the net international investment position is positive.
C)national savings are less than domestic investment.
D)government accounts are in deficit.
E)the current account balance is greater than domestic investment.

Answer 2

A

Question 3

A sudden stop will be easier to navigate if the country borrows internationally in foreign currencies and lend locally in its domestic currency.

Answer 3

False

Question 4

Use the following table to answer the next question(s).All values are net.
Table 9.3

Based on Table 9.3,if values in the table are amended to reflect a net increase in U.S.foreign direct investment of 100,then the new balance for the capital account balance becomes

A)-75.
B)-25.
C)+25.
D)+75.
E)+225.

Question 5

Use the following table to answer the next question(s).All values are net.
Table 9.3

Based on Table 9.3,the capital account balance is equal to

A)+25.
B)-25.
C)-125.
D)+125.
E)-225.

Question 6

If a country runs a current account surplus and national private savings equals domestic investment,then the combined governmental accounts

A)must be balanced.
B)must be positive.
C)must be negative.
D)could be either negative or positive,depending on the capital account.
E)could be either negative or positive,depending on the net international investment position.

Question 7

Capital controls are most often aimed at slowing or eliminating movements of

A)reserve assets.
B)foreign direct investment.
C)foreign portfolio investment.
D)nonreserve government assets.
E)None of the above.

Question 8

Table 9.1

Based on Table 9.1,the statistical discrepancy is

A)+100.
B)+200.
C)0)
D)-100.
E)-200.

Question 9

Looking at the financial account data,it is possible to determine the total amount of official reserves available to a nation.

Question 10

Which of the following is NOT part of the current account?

A)Dividends received on a foreign investment
B)Purchase of a plane ticket on a foreign airline
C)Shipment of food aid to a poor country
D)Purchase of a foreign bond
E)All of the above.

Question 11

What were some of the consequences of the large current account deficits that the U.S.ran over a long period of time that culminated in the crisis that began in 2007?

Question 12

A current account deficit implies that

A)the financial account is negative.
B)the financial account is in surplus.
C)exports of goods and services exceed imports of goods and services.
D)unilateral transfers are positive.
E)None of the above.

Question 13

Describe how a sudden stop leads to a financial crisis.

Question 14

People sometimes worry that American trade with other countries will lead to large U.S.trade deficits and the movement of massive amounts of American capital out of the country.This worry is unfounded because countries cannot

A)increase savings at the same time that a trade deficit grows.
B)spend more than they earn.
C)invest more than they save.
D)have both current account and financial account deficits at the same time.
E)increase their trade with other countries without increasing their savings.

Question 15

Table 9.1

Based on Table 9.1,the balance on the financial account is

A)+100.
B)+200.
C)0)
D)-100.
E)-200.

Question 16

In most of the financial crises of the last decade,there were large and sudden financial outflows as both home and foreign investors tried to avoid the expected crises.

Question 17

All of the following are true about foreign direct investment (FDI)and portfolio investment except

A)increases in the flow of portfolio investments increase the likelihood of financial crisis.
B)both portfolio investments and FDI are the same in that they both give their holders a claim on the future output of the foreign economy.
C)FDI is relatively illiquid compared to portfolio investment.
D)portfolio investments have been on the decline in recent years (or decades).
E)FDI investors must be willing to go through many ups and downs in order to benefit from their long-term investments.

Question 18

Table 9.1

Based on Table 9.1,the balance on the current account is

A)+100.
B)+200.
C)0)
D)-100.
E)-200.

Question 19

If the residents of a country receive income from their foreign investments,it is counted as a

A)credit in the current account.
B)debit in the current account.
C)credit in the capital account.
D)debit in the capital account.
E)debit in either the capital or current account,depending on the type of investment income.

Question 20

The current account balance of the United States began to deteriorate in

A)the late 1960s.
B)the early 1970s.
C)the early 1980s.
D)the late 1980s.
E)the early 1990s.

Question 21

During the 1990s,which of the following did NOT occur?

A)Private savings fell.
B)Investment rose.
C)Public savings increased.
D)The United States received capital inflows.
E)Private savings was greater than investment for most of the 1990s.

Question 22

Which of the following is FALSE about the Highly Indebted Poor Countries initiative?

A)Most of the countries included are in sub-Saharan Africa.
B)Countries qualify for debt relief partly based on their level of poverty.
C)Countries do not have to have established a past track record of economic reform in order to qualify as long as they make future commitments.
D)External debt levels must be high relative to exports in order to qualify.

Question 23

What is the difference between the U.S.current account deficits of the 1980s and the 1990s?

Question 24

Which of the following is FALSE?

A)In 2002,the United States imported more goods and services from foreign suppliers than it exported to foreign purchasers.
B)Services are almost one-third of total exports and are a growing part of U.S.and world trade.
C)The U.S.trade balance in services is in deficit.
D)With the exception of the Gulf War period in 1991,the U.S.current account has been in deficit since the 1980s.

Question 25

Your text considers both the low savings and high savings nations and concludes what about the relationship between government budgets and the current account?

Question 26

Use the following table to answer the next question(s).All values are measured as a percent of GNP.
Table 9.2

Based on Table 9.2,the current account balance is

A)-2 percent of GNP.
B)+2 percent of GNP.
C)+4 percent of GNP.
D)-4 percent of GNP.
E)None of the above.

Question 27

If all government budgets are balanced,and S is greater than I,then

A)the net international investment position must be positive.
B)the financial account must be positive.
C)the financial account must be negative.
D)the net international investment position must be negative.
E)Both A and B.

Question 28

One of the problems with excessive debt is that

A)it worsens the central government's budget position by adding large debt service payments to other budget items.
B)it reduces the quantity of resources available to invest in economic development.
C)if debt service is substantial,schools,health clinics,roads,ports,other infrastructure,and social needs are less likely to be addressed.
D)it can intensify and spread a crisis.
E)All of the above.

Question 29

Which of the following is NOT true about this national income equation:

A)For the current account,CA,to improve,we may have to invest less than otherwise would be the case.
B)For the current account,CA,to improve,we may have to save more to maintain the same amount of investment that includes foreign saving.
C)For the current account,CA,to improve,the government may have to run budget surplus.
D)A reduction in the trade deficit with one country will simply show up as an increase in a trade deficit with another country.
E)None of the above.

Question 30

Use the following table to answer the next question(s).All values are measured as a percent of GNP.
Table 9.2

Based on Table 9.2,total savings,private plus public,is equal to

A)3 percent of GNP.
B)18 percent of GNP.
C)16 percent of GNP.
D)20 percent of GNP.
E)None of the above.

Question 31

Global capital flows have completely broken the link between domestic savings and domestic investment.

Question 32

If domestic savings is less than domestic investment,then

A)a trade deficit occurs.
B)the government runs a budget deficit.
C)there will be a negative foreign investment.
D)a trade surplus must result.
E)Both A and C.

Question 33

How do recent current account deficits compare to GNP and to past ratios?

Question 34

Your text identifies all of the following as reasons why unsustainable debt may occur except

A)when countries are dependent on one or two key export commodities,and there is a sudden drop in the price of those commodities.
B)when natural disasters occur.
C)when civil conflicts are resolved and a peace dividend occurs.
D)when there are corrupt politicians and practices.
E)when government officials try to buy votes with unsustainable spending.

Question 35

Which of the following is FALSE?

A)Current account deficits must be financed through inflows of capital.
B)Loans from abroad add to a country's stock of external debt and generate debt service.
C)Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability.
D)Debt service can become an unsustainable burden that holds back development.
E)All countries have external debt.

Question 36

Debt service

A)is rarely an issue for high-income countries.
B)always makes a country worse off for having borrowed.
C)is a problem when the amount of debt is small relative to the size of the economy.
D)tends to benefit low- and middle-income countries at the expense of high-income countries.

Question 37

The difference between GNP and GDP is

A)GNP includes income received from abroad and excludes income paid abroad.
B)GNP excludes income received from abroad and includes income paid abroad.
C)GNP includes exports and imports.
D)GNP excludes exports and imports.
E)GNP includes capital flows received from abroad and excludes capital flows to foreign countries.

Question 38

Briefly describe the factors that contributed to the U.S.Current Account deficits of the 1990s.

Question 39

Which of the following is NOT true about the national income identity given by the equation:

A)If CA is positive,national saving finances the purchase of our goods by foreign users.
B)If CA is negative,our investment exceeds our national savings.
C)A negative CA may imply that foreigners have confidence in the U.S.economy.
D)If CA is negative and large,a country risks foreigners owning a large piece of its assets.
E)None of the above.

Question 40

Typically,the most important determinant of private investment in an economy is

A)the inflow of foreign investment.
B)the size of the capital account surplus.
C)the size of the current account deficit.
D)the outflow of private investment.
E)the amount of domestic savings.

Question 41

It is important to compare debt levels of low- and middle-income countries to exports because countries must earn foreign exchange in order to service their debts.

Question 42

The United States international investment position is negative.

Question 43

Total debt is more important in figuring out the ability of a country to service its debt than are debt to GDP and debt to export ratios.

Question 44

There are debt relief programs currently available for highly indebted poor countries.

Question 45

Critics of debt relief make all of the following arguments except

A)it would be wasted money since the conditions that caused the debt would be likely to persist.
B)countries with large foreign debts are poorly administered.
C)debt relief can quickly fuel a new round of borrowing that simply restores debt to prior levels.
D)debt relief will encourage other nations to borrow excessively with the hope that their debts may be forgiven in the future.
E)the cost of debt relief to the most severely indebted countries is too large for the high income countries to afford.

Question 46

Technology transfer comes only from nations importing new capital goods in the current account.

Question 47

Describe the technology transfer benefit of capital flows and the political power cost of large capital flows into low-income countries.

Question 48

Between 1972 and 1999,the majority of loans to HIPC countries went to regimes considered "not free," and between 1985 and 1995,to places that were considered "corrupt" by international organizations.

Question 49

Capital inflows that take the form of direct investment may be particularly beneficial if they bring new technologies,new management techniques,and new ideas to the host country.

Question 50

What does a current account deficit do that is positive for a nation?

Question 51

An example of odious debt would be debts on the part of a nation that were incurred by a dictator for the well being of his family.

Question 52

For the United States,U.S.direct foreign investment abroad is more significant than foreign investment in U.S.securities and currency.

Question 53

Ultimate solutions to the problems of unsustainable debt must take into account the incentives for lenders to make loans.

Question 54

For countries such as the United States and the United Kingdom,it is important to have trade surpluses in order to service their external debts.