CHAPTER 11 THE BALANCE OF PAYMENTS

MULTIPLE-CHOICE QUESTIONS

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

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

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

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

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

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

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

Table 11.1 gives hypothetical figures for U.S. International Transactions. On the basis of this information, answer
Questions 8 and 9.
 Table 11.1. 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 (excluding military) –5
Foreign private assets in the U.S. 25
Compensation of employees –5
Allocation of SDRs 5
Travel and transportation receipts, net 20

8. Based on the information provided in Table 11.1, the goods and services balance equals:
a. $5 billion
b. $15 billion
c. $20 billion
d. $25 billion

9. Based on the information provided in Table 11.1, the current account balance equals:
a. –$5 billion
b. –$10 billion
c. –$15 billion
d. –$20 billion

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
d. Trade position of a country over a one-year period

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

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
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

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

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

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

a. Merchandise trade account
b. Capital account
c. Current account
d. Official settlements account

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

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

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

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
Using the data of Table 11.2, answer Question 21.

Table 11.2. 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

21. Consider Table 11.2. The U.S. balance of international indebtedness suggests that the United States is a net:
a. Debtor
b. Creditor
c. Spender
d. Exporter

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

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

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

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

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

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

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

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

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

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

33. Reducing a current account deficit 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 increase private investment relative to saving
d. Decrease the government’s deficit and decrease private investment relative to saving

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
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

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

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

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

TRUE-FALSE QUESTIONS

Table 11.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a year. Answer the
next seven questions on the basis of this information.
 Table 11.3. 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

T F 1. Consider Table 11.3. The merchandise-trade balance registered a deficit of $50 billion.

T F 2. Consider Table 11.3. The services balance registered a surplus of $100 billion.

T F 3. Consider Table 11.3. The goods-and-services balance registered a surplus of $50 billion.

T F 4. Consider Table 11.3. The unilateral-transfers balance registered a deficit of $40 billion.

T F 5. Consider Table 11.3. The current-account balance registered a surplus of $30 billion.

T F 6. Consider Table 11.3. The “net exports” component of the U.S. gross domestic product
registered $–110 billion.

T F 7. Consider Table 11.3. The payments data suggest that the United States was a “net demander”
of $30 billion from the rest of the world.

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

T F 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.

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

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

T F 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.

T F 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.

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

T F 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.

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

T F 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.

T F 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.

T F 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.

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

T F 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.

T F 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.

T F 24. Current-account transactions include direct foreign investment, purchases of foreign

government securities, and commercial bank loans made abroad.

T F 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.

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

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

T F 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.

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

T F 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.

T F 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.

T F 33. Concerning the balance of payments, a current-account deficit results in a worsening of a

country’s net foreign investment position.

T F 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.

T F 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.

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

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

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

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

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

T F 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.

T F 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.

T F 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.

T F 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.
T F 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.

T F 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.

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

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

T F 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.

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

T F 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.

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

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

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

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

T F 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.

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

Answers to Multiple-Choice Questions

1. a 9. c 17. c 25. b 33. d

2. b 10. a 18. c 26. d 34. a
3. c 11. d 19. b 27. a 35. a
4. a 12. b 20. a 28. d 36. d
5. d 13. d 21. b 29. b 37. a
6. a 14. b 22. c 30. d 38. a
7. a 15. d 23. a 31. b
8. c 16. c 24. a 32. a

Answers to True-False Questions

1. T 13. T 25. T 37. T 49. F

2. T 14. F 26. T 38. F 50. T
3. T 15. T 27. T 39. T 51. T
4. F 16. T 28. F 40. F 52. F
5. F 17. F 29. T 41. T 53. F
6. F 18. T 30. T 42. T 54. F
7. F 19. F 31. T 43. F 55. T
8. F 20. T 32. F 44. T 56. T
9. T 21. T 33. T 45. F 57. T
10. F 22. F 34. F 46. T
11. F 23. T 35. T 47. F
12. T 24. F 36. T 48. T