CHAPTER 10THE 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 PS: 1
!. he balance of international indebtedness is a record of a country"s international:
a
.
#n$estment position o$er a period of time
b
.
#n$estment position at a fi%ed point in time
c
.
rade position o$er a period of time
d
.
rade position at a fi%ed point in time
ANS: & PS: 1
'. (hich balance-of-payments item does not directly enter into the calculation of the U.S. )ross domestic
product*
a
.
+erchandise imports
b
.
Shippin) and transportation receipts
c
.
,irect forei)n in$estment
d
.
Ser$ice e%ports
ANS: C PS: 1
-. (hich of the follo.in) is considered a capital inflo.*
a
.
A sale of U.S. financial assets to a forei)n buyer
b
.
A loan from a U.S. ban/ to a forei)n borro.er
c
.
A purchase of forei)n financial assets by a U.S. buyer
d A U.S. citi0en"s repayment of a loan from a forei)n ban/
.
ANS: A PS: 1
1. (hich of the follo.in) .ould call for inpayments to the United States*
a
.
American imports of 2erman steel
b
.
2old flo.in) out of the United States
c
.
American unilateral transfers to less-de$eloped countries
d
.
American firms sellin) insurance to &ritish shippin) companies
ANS: , PS: 1
3. #n a country"s balance of payments, .hich of the follo.in) transactions are debits*
a
.
,omestic ban/ balances o.ned by forei)ners are decreased
b
.
4orei)n ban/ balances o.ned by domestic residents are decreased
c
.
Assets o.ned by domestic residents are sold to nonresidents
d
.
Securities are sold by domestic residents to nonresidents
ANS: A PS: 1
5. (hich of the follo.in) is classified as a credit in the U.S. balance of payments*
a
.
U.S. e%ports
b
.
U.S. )ifts to other countries
c
.
A flo. of )old out of the U.S.
d
.
4orei)n loans made by U.S. companies
ANS: A PS: 1
Table 10.1 gives hypothetical figures for U.S. International Transactions.
Table 10.1. U.S. International Trana!tion
Amount
ransaction 6billions of dollars7
+erchandise imports 118
+ilitary transactions, net -1
9emittances, pensions, transfers -!8
U.S. pri$ate assets abroad -18
+erchandise e%ports 111
#n$estment income, net 11
U.S. )o$ernment )rants -1
6e%cludin) military7
4orei)n pri$ate assets in the U.S. !1
Compensation of employees -1
Allocation of S,9s 1
ra$el and transportation receipts, net !8
:. 9eferrin) to able 18.1, the )oods and ser$ices balance e;uals:
a
.
<1 billion
b
.
<11 billion
c
.
<!8 billion
d
.
<!1 billion
ANS: C PS: 1
=. 9eferrin) to able 18.1, the current account balance e;uals:
a
.
<1 billion
b
.
<18 billion
c
.
<11 billion
d
.
<!8 billion
ANS: A PS: 1
18. Unli/e the balance of payments, the balance of international indebtedness indicates the international:
a
.
#n$estment position of a country at a )i$en moment in time
b
.
#n$estment position of a country o$er a one-year period
c
.
rade position of a country at a )i$en moment in time
d
.
rade position of a country o$er a one-year period
ANS: A PS: 1
11. (hich of the follo.in) indicates the international in$estment position of a country at a )i$en moment
in time*
a
.
he balance of payments
b
.
he capital account of the balance of payments
c
.
he current account of the balance of payments
d
.
he balance of international indebtedness
ANS: , PS: 1
1!. Concernin) the U.S. balance of payments, .hich account is defined in essentially the same .ay as the
net e%port of )oods and ser$ices, .hich comprises part of the country"s )ross domestic product*
a
.
+erchandise trade account
b
.
2oods and ser$ices account
c
.
Current account
d
.
Capital account
ANS: & PS: 1
1'. #f an American recei$es di$idends from the shares of stoc/ she or he o.ns in oyota, #nc., a >apanese
firm, the transaction .ould be recorded on the U.S. balance of payments as a:
a
.
Capital account debit
b
.
Capital account credit
c
.
Current account debit
d
.
Current account credit
ANS: , PS: 1
1-. #f the United States )o$ernment sells military hard.are to Saudi Arabia, the transaction .ould 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: & PS: 1
11. he U.S. balance of trade is determined by:
a
.
?%chan)e rates
b
.
2ro.th of economies o$erseas
c
.
9elati$e prices in .orld mar/ets
d
.
All of the abo$e
ANS: , PS: 1
13. U.S. military aid )ranted to forei)n countries is entered in the:
a
.
+erchandise trade account
b
.
Capital account
c
.
Current account
d
.
Official settlements account
ANS: C PS: 1
15. #f the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:
a
.
he official settlements account
b
.
he capital account
c
.
?ither the official settlements account or the capital account
d
.
&oth the official settlements account and the capital account
ANS: C PS: 1
1:. he current account of the U.S. balance of payments does not include:
a
.
#n$estment income
b
.
+erchandise e%ports and imports
c
.
he sale of securities to forei)ners
d
.
Unilateral transfers
ANS: C PS: 1
1=. he U.S. has a balance of trade deficit .hen its:
a
.
+erchandise e%ports e%ceed its merchandise imports
b
.
+erchandise imports e%ceed its merchandise e%ports
c
.
2oods and ser$ices e%ports e%ceed its )oods and ser$ices imports
d
.
2oods and ser$ices imports e%ceed its )oods and ser$ices e%ports
ANS: & PS: 1
!8. he $alue to American residents of income earned from o$erseas in$estments sho.s up in .hich
account in the U.S. balance of payments*
a
.
Current account
b
.
rade account
c
.
Unilateral transfers account
d
.
Capital account
ANS: A PS: 1
Table 10.". International In#et$ent Poition o% t&e Unite' State
U.S. assets abroad
U.S. )o$ernment assets <:88 billion
U.S. pri$ate assets <!88 billion
4orei)n assets in the U.S.
4orei)n official assets <388 billion
4orei)n pri$ate assets <'88 billion
!1. Consider able 18.!. he U.S. balance of international indebtedness su))ests that the United States is a
net:
a
.
,ebtor
b
.
Creditor
c
.
Spender
d
.
?%porter
ANS: & PS: 1
!!. 4or the first time since (orld (ar #, in 1=:1 the United States became a net international:
a
.
?%porter
b
.
#mporter
c
.
,ebtor
d
.
Creditor
ANS: C PS: 1
!'. A country that is a net international debtor initially e%periences:
a
.
An au)mented sa$in)s pool a$ailable to finance domestic spendin)
b
.
A hi)her interest rate, .hich leads to lo.er domestic in$estment
c
.
A loss of funds to tradin) partners o$erseas
d
.
A decrease in its ser$ices e%ports to other countries
ANS: A PS: 1
!-. Credit 6@7 items in the balance of payments correspond to anythin) that:
a
.
#n$ol$es receipts from forei)ners
b
.
#n$ol$es payments to forei)ners
c
.
,ecreases the domestic money supply
d
.
#ncreases the demand for forei)n e%chan)e
ANS: A PS: 1
!1. ,ebt 6-7 items in the balance of payments correspond to anythin) that:
a
.
#n$ol$es receipts from forei)ners
b
.
#n$ol$es payments to forei)ners
c
.
#ncreases the domestic money supply
d
.
,ecreases the demand for forei)n e%chan)e
ANS: & PS: 1
!3. (hen all of the debit or credit items in the balance of payments are combined:
a
.
+erchandise imports e;ual merchandise e%ports
b
.
Capital imports e;ual capital e%ports
c
.
Ser$ices e%ports e;ual ser$ices imports
d
.
he total surplus or deficit e;uals 0ero
ANS: , PS: 1
!5. #n the balance of payments, the statistical discrepancy is used to:
a
.
?nsure that the sum of all debits matches the sum of all credits
b
.
?nsure that trade imports e;ual the $alue of trade e%ports
c
.
Obtain an accurate account of a balance-of-payments deficit
d
.
Obtain an accurate account of a balance-of-payments surplus
ANS: A PS: 1
!:. All of the follo.in) are credit items in the balance of payments, e%cept:
a
.
#n$estment inflo.s
b
.
+erchandise e%ports
c
.
Payments for American ser$ices to forei)ners
d
.
Pri$ate )ifts to forei)n residents
ANS: , PS: 1
!=. All of the follo.in) are debit items in the balance of payments, e%cept:
a
.
Capital outflo.s
b
.
+erchandise e%ports
c
.
Pri$ate )ifts to forei)ners
d
.
4orei)n aid )ranted to other nations
ANS: & PS: 1
'8. he role of AAAA is to direct one nation"s sa$in)s into another nation"s in$estments:
a
.
+erchandise trade flo.s
b
.
Ser$ices flo.s
c
.
Current account flo.s
d
.
Capital flo.s
ANS: , PS: 1
'1. (hen a country reali0es a deficit on its current account:
a
.
#ts net forei)n in$estment position becomes positi$e
b
.
#t becomes a net demander of funds from other countries
c
.
#t reali0es an e%cess of imports o$er e%ports on )oods and ser$ices
d
.
#t becomes a net supplier of funds to other countries
ANS: & PS: 1
'!. 9educin) a current account deficit re;uires a country to:
a
.
#ncrease pri$ate sa$in) relati$e to in$estment
b
.
#ncrease pri$ate consumption relati$e to sa$in)
c
.
#ncrease pri$ate in$estment relati$e to consumption
d
.
#ncrease pri$ate in$estment relati$e to sa$in)
ANS: A PS: 1
''. 9educin) a current account deficit re;uires a country to:
a
.
#ncrease the )o$ernment"s deficit and increase pri$ate in$estment relati$e to sa$in)
b
.
#ncrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)
c
.
,ecrease the )o$ernment"s deficit increase pri$ate in$estment relati$e to sa$in)
d
.
,ecrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)
ANS: , PS: 1
'-. 9educin) a current account surplus re;uires a country to:
a
.
#ncrease the )o$ernment"s deficit and increase pri$ate in$estment relati$e to sa$in)
b
.
#ncrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)
c
.
,ecrease the )o$ernment"s deficit and increase pri$ate in$estment relati$e to sa$in)
d
.
,ecrease the )o$ernment"s deficit and decrease pri$ate in$estment relati$e to sa$in)
ANS: A PS: 1
'1. Concernin) a country"s business cycle, rapid )ro.th of production and employment is commonly
associated .ith:
a
.
Bar)e or )ro.in) trade deficits and current account deficits
b
.
Bar)e or )ro.in) trade deficits and current account surpluses
c
.
Small or shrin/in) trade deficits and current account deficits
d
.
Small or shrin/in) trade deficits and current account surpluses
ANS: A PS: 1
'3. he burden of a current account deficit .ould be the least if a nation uses .hat it borro.s to finance:
a
.
Unemployment compensation benefits
b
.
Social Security benefits
c
.
?%penditures on food and recreation
d
.
#n$estment on plant and e;uipment
ANS: , PS: 1
'5. Concernin) a country"s business cycle, AAAA is commonly associated .ith lar)e or )ro.in) current
account deficits:
a
.
9apid )ro.th rates of production and employment
b
.
Slo. )ro.th rates of production and employment
c
.
4allin) interest rates on )o$ernment securities
d
.
4allin) interest rates on corporate securities
ANS: A PS: 1
':. Accordin) to researchers at the 4ederal 9eser$e, the loss of Cobs associated .ith a deficit in the current
account tends to be:
a
.
Offset by the increase of Cobs associated .ith a surplus in the capital account
b
.
9einforced by the decrease of Cobs associated .ith a surplus in the capital account
c
.
A threat to the le$el of employment for the economy as a .hole
d
.
Of no lon)-run economic conse;uence for .or/ers .ho lose their Cobs
ANS: A PS: 1
TRUE(FALSE
Table 10.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a year.
Table 10.). International Trana!tion o% t&e Unite' State
Amount
6billions of dollars7 ransaction
Allocation of S,9s 18
Chan)es in U.S. assets abroad 188
Statistical discrepancy -11
+erchandise imports --88
Payments on forei)n assets in U.S. -!8
9emittances, pensions, transfers -38
ra$el and transportation receipts, net '8
+ilitary transactions, net -18
#n$estment income, net 188
+erchandise e%ports '18
U.S. )o$ernment )rants 6e%cludin) military7 -!8
Chan)es in forei)n assets in the U.S. 1=8
Other ser$ices, net :8
9eceipts on U.S. in$estments abroad '8
Compensation of employees -18
1. 9efer to able 18.'. he merchandise-trade balance re)istered a deficit of <18 billion.
ANS: PS: 1
!. 9efer to able 18.'. he ser$ices balance re)istered a surplus of <188 billion.
ANS: PS: 1
'. 9efer to able 18.'. he )oods-and-ser$ices balance re)istered a surplus of <18 billion.
ANS: PS: 1
-. 9efer to able 18.'. he unilateral-transfers balance re)istered a deficit of <-8 billion.
ANS: 4 PS: 1
1. 9efer to able 18.'. he current-account balance re)istered a surplus of <'8 billion.
ANS: 4 PS: 1
3. 9efer to able 18.'. he Dnet e%portsD component of the U.S. )ross domestic product re)istered <-118
billion.
ANS: 4 PS: 1
5. 9efer to able 18.'. he payments data su))est that the United States .as a Dnet demanderD of <'8
billion from the rest of the .orld.
ANS: 4 PS: 1
:. he balance of payments refers to the stoc/ of trade and in$estment transactions that e%ists at a
particular point in time.
ANS: 4 PS: 1
=. 9eferrin) to the balance-of-payments statement, an international transaction refers to the e%chan)e of
)oods, ser$ices, and assets bet.een residents of one country and those abroad.
ANS: PS: 1
18. he balance of payments includes international transactions of households and businesses, but not
)o$ernment.
ANS: 4 PS: 1
11. &ecause the balance of payments utili0es double-entry accountin), merchandise e%ports .ill al.ays be
in balance .ith merchandise imports.
ANS: 4 PS: 1
1!. On the U.S. balance-of-payments statement, the follo.in) transactions are credits, leadin) to the
receipt of dollars from forei)ners: merchandise e%ports, transportation receipts, income recei$ed from
in$estments abroad, and in$estments in the United States by forei)n residents.
ANS: PS: 1
1'. On the U.S. balance of payments, the follo.in) transactions are debits, leadin) to payments to
forei)ners: merchandise imports, tra$el e%penditures, )ifts to forei)n residents, and o$erseas
in$estments by U.S. residents.
ANS: PS: 1
1-. he D)oods and ser$icesD account of the balance of payments sho.s the monetary $alue of
international flo.s associated .ith transactions in )oods, ser$ices, and unilateral transfers.
ANS: 4 PS: 1
11. An increase in import restrictions by the U.S. )o$ernment tends to promote a merchandise-trade
surplus.
ANS: PS: 1
13. Ser$ices transactions on Canada"s balance-of-payments statement .ould include Canadian ships
transportin) lumber to >apan, forei)n tourists spendin) money in Canada, and Canadian en)ineers
desi)nin) brid)es in China.
ANS: PS: 1
15. On the balance-of-payments statement, di$idend and interest income are classified as capital-account
transactions.
ANS: 4 PS: 1
1:. A surplus on 2ermany"s )oods-and-ser$ices balance indicates that 2ermany has sold more )oods and
ser$ices to forei)ners than it has bou)ht from them o$er a one-year period.
ANS: PS: 1
1=. he merchandise-trade account on the balance-of-payments statement is defined the same .ay as Dnet
e%portsD .hich constitutes part of the nation"s )ross domestic product.
ANS: 4 PS: 1
!8. A positi$e balance on the )oods-and-ser$ices account of the balance of payments indicates an e%cess
of e%ports o$er imports .hich must be added to the nation"s )ross domestic product.
ANS: PS: 1
!1. 4or the United States, merchandise trade has )enerally constituted the lar)est portion of its )oods-and-
ser$ices account.
ANS: PS: 1
!!. Unilateral transfers refer to t.o-sided transactions, reflectin) the mo$ement of )oods and ser$ices in
one direction .ith correspondin) payments in the other direction.
ANS: 4 PS: 1
!'. Unilateral transfers consist of pri$ate-sector transfers, such as church contributions to alle$iate
star$ation in Africa, as .ell as )o$ernmental transfers, such as forei)n aid.
ANS: PS: 1
!-. Current-account transactions include direct forei)n in$estment, purchases of forei)n )o$ernment
securities, and commercial ban/ loans made abroad.
ANS: 4 PS: 1
!1. On the U.S. balance-of-payments statement, a capital inflo. .ould occur if a S.iss resident purchases
the securities of the U.S. )o$ernment.
ANS: PS: 1
!3. #f oyota #nc. of >apan builds an automobile assembly plant in the United States, the >apanese capital
account .ould re)ister an outflo..
ANS: PS: 1
!5. #f &an/ of America recei$es repayment for a loan it made to a +e%ican firm, the U.S. capital account
.ould re)ister an inflo..
ANS: PS: 1
!:. On the balance-of-payments statement, a capital inflo. can be li/ened to the import of )oods and
ser$ices.
ANS: 4 PS: 1
!=. he capital account of the balance of payments includes pri$ate-sector transactions as .ell as official-
settlements transactions of the home country"s central ban/.
ANS: PS: 1
'8. #f the current account of the balance of payments re)isters a deficit, the capital account re)isters a
surplus, and $ice $ersa.
ANS: PS: 1
'1. Concernin) the balance of payments, a current-account surplus means an e%cess of e%ports o$er
imports of )oods, ser$ices, in$estment income, and unilateral transfers.
ANS: PS: 1
'!. #f a country reali0es a current-account deficit in its balance of payments, it becomes a net supplier of
funds to the rest of the .orld.
ANS: 4 PS: 1
''. Concernin) the balance of payments, a current-account deficit results in a .orsenin) of a country"s net
forei)n in$estment position.
ANS: PS: 1
'-. #n the balance-of-payments statement, statistical discrepancy is treated as part of the merchandise trade
account because merchandise transactions are )enerally the most fre;uent source of error.
ANS: 4 PS: 1
'1. &ecause a lar)e number of international transactions fail to )et recorded, statisticians insert a residual,
/no.n as statistical discrepancy, to ensure that total debits e;ual total credits.
ANS: PS: 1
'3. Concernin) the balance of payments, the )oods-and-ser$ices balance is commonly referred to as the
Dtrade balanceD by the ne.s media.
ANS: PS: 1
'5. Since the 1=58s, the merchandise trade account of the U.S. balance of payments has re)istered deficit.
ANS: PS: 1
':. Althou)h the United States has reali0ed merchandise trade deficits since the early 1=58s, its )oods-
and-ser$ices balance has al.ays re)istered surplus.
ANS: 4 PS: 1
'=. #n the past t.o decades, the U.S. ser$ices balance has )enerally re)istered surplus.
ANS: PS: 1
-8. he U.S. unilateral-transfers balance has consistently re)istered surplus in the past t.o decades.
ANS: 4 PS: 1
-1. &ecause the balance of payments is a record of the economic transactions of a country o$er a period of
time, it is a Dflo.D concept.
ANS: PS: 1
-!. he United States .ould be a Dnet creditorD if the $alue of U.S. assets abroad e%ceeded the $alue of
forei)n assets in the United States.
ANS: PS: 1
-'. #f a country consistently reali0es a current-account surplus in its balance of payments, it li/ely .ill
become a Dnet debtorD in its balance of international indebtedness.
ANS: 4 PS: 1
--. &y the mid-1=:8s, the United States had e$ol$ed from the status of a net-creditor nation to a net-
debtor nation in its balance of international indebtedness.
ANS: PS: 1
-1. he net-debtor status, that the United States achie$ed in its balance of international indebtedness by
the mid-1=:8s, reflected the continuous current-account surplus that the United States attained in its
balance of payments durin) the 1=58s.
ANS: 4 PS: 1
-3. Althou)h a net-debtor country may initially benefit from an inflo. of sa$in)s from abroad, o$er the
lon) run continued borro.in) results in )ro.in) di$idend payments to forei)ners and a drain on the
debtor-country"s economic resources.
ANS: PS: 1
-5. he official reser$e assets of the United States consist of holdin)s of )old and forei)n corporate
securities.
ANS: 4 PS: 1
-:. hat U.S. importers purchase bananas from &ra0il constitutes a debit transaction on the U.S. balance
of payments.
ANS: PS: 1
-=. hat 2erman in$estors collect interest income on their holdin)s of U.S. reasury bills constitutes a
credit transaction on the U.S. balance of payments.
ANS: 4 PS: 1
18. hat U.S. charities donate funds to combat star$ation in Africa constitutes a debit transaction on the
U.S. balance of payments.
ANS: PS: 1
11. o reduce a current account deficit, a country should either decrease the bud)et deficit of its
)o$ernment or reduce in$estment spendin) relati$e to sa$in).
ANS: PS: 1
1!. +ost economists belief that in the 1=:8s, a massi$e outflo. of capital caused a current account deficit
for the United States.
ANS: 4 PS: 1
1'. A current account deficit for the United States necessarily reduces the standard of li$in) for American
households.
ANS: 4 PS: 1
1-. 9apid )ro.th of production and employment is commonly associated .ith lar)e or )ro.in) trade
surpluses and current account surpluses.
ANS: 4 PS: 1
11. Often, countries reali0in) rapid economic )ro.th rates possess lon)-run current account deficits.
ANS: PS: 1
13. 4or the United States, a conse;uence of its current account deficit is a )ro.in) forei)n o.nership of
the capital stoc/ of the United States and a risin) fraction of U.S. income that must be di$erted abroad
in the form of interest and di$idends to forei)ners.
ANS: PS: 1
15. +ost economists contend that any reduction in the current account deficit is better achie$ed throu)h
increased national sa$in) than throu)h reduced domestic in$estment.
ANS: PS: 1
SHORT ANS*ER
1. (hat are the components of the current account of the balance of payments*
ANS:
he current account includes transactions in )oods and ser$ices, income flo.s, and unilateral transfers.
PS: 1
!. Concernin) the balance of international indebtedness, .hen is a country a net creditor or a net debtor*
ANS:
A country is a net creditor .hen its claims on forei)n nations e%ceed forei)n claims on it. he nation is
a net debtor .hen forei)n nations" claims on it e%ceed its claims on forei)n nations.
PS: 1
ESSAY
1. Eo. do .e measure the international in$estment position of the United States at any point in time*
Eo. did the U.S. become a net debtor nation so rapidly*
ANS:
he international in$estment position of the United States is measured by the monetary $alue of U.S.
assets abroad $ersus forei)n assets in the United States. Unli/e the balance of payments, .hich is a
flo. concept, the balance of international indebtedness is a stoc/ concept. he reason for the U.S.
becomin) a net debtor nation is that forei)n in$estors ha$e placed more funds in the United States than
the U.S. residents ha$e in$ested abroad. he United States has been considered attracti$e to forei)n
in$estors.
PS: 1
!. (hat does a current account deficit mean*
ANS:
(hen a country reali0es a deficit in its current account, it has an e%cess of imports o$er e%ports of
)oods, ser$ices, income, and unilateral transfers. his leads to an increase in net forei)n claims upon
the home country. he home country becomes a net demander of funds from abroad, the demand bein)
met throu)h borro.in) from other countries or li;uidatin) forei)n assets. he result is a .orsenin) of
the home country"s net forei)n in$estment position.
PS: 1