c.23 problem sets

Which of the following is not a component of the current account balance?

tariffs The current account balance has four components: goods, services, investment income and payments, and unilateral transfers.

Which of the following is considered a source of investment income for a nation?

• foreign investments in real estate • stocks • bonds International flows of financial capital refer to all of the ways in which private investors in one country may invest in another country—by buying real estate, companies, and financial investments like stocks and bonds.

Which of the following best represents a nation experiencing a trade deficit?

A nation with an economy that is experiencing a net inflow of financial capital. • A trade deficit represents an inflow of financial capital coming into the domestic economy and being invested. Therefore, a nation with a trade deficit has an economy that is experiencing a net inflow of financial capital.

True or false? Today, the United States and other countries measure the balance of trade by tracking only the goods and not the services traded between countries.

False Decades ago, economies measured the balance of trade by physical items traded. Today, goods make up less than half of most countries' total production, and services comprise more than half. Today, the current account encompasses four main components: merchandise trade, services, income payments, and unilateral transfers.

A trade deficit occurs when:

imports exceed exports

All of the following statements are true, except:

An increase in the trade surplus will increase financial capital inflows into an economy. A trade surplus will involve an outflow of financial capital to other countries. A trade surplus means that the domestic financial capital is in surplus within a country and can be invested in other countries.

Which of the following statements is true?

If the trade deficit increases, the current account balance becomes more negative. • If the trade deficit is increasing, imports must be growing at a faster rate than exports. This results in a decrease in the trade balance and, consequently, a decrease in the current account balance.

All of the following statements about the United States running a trade deficit are true, except:

The United States has yet to experience a trade deficit. • The United States ran a trade deficit in 40 of the 45 years from 1831 to 1875, which meant that it was importing capital from abroad over that time. Such financial capital was mostly invested in projects like railroads that brought a substantial economic payoff.

Which of the following could be considered a potential disadvantage of a trade deficit to an economy?

The inflow of financial capital may not boost productivity adequately.

True or False? An increase in the trade surplus is considered a good thing for domestic producers.

True A trade surplus means exports are greater than imports. Therefore domestic producers enjoy when exports rise.

true or false? The current account balance includes merchandise trade, unilateral transfers, and income payments.

True The current account balance has four components: goods, services, investment income and payments, and unilateral transfers.

True or False? The balance of trade of manufactured goods is considered to be part of the merchandise trade.

True The merchandise trade balance is defined as the balance of trade of commodities, food, fuel, and manufactured goods.

The table shows the amounts of balances of various current account components. Use the information in the table to calculate the current account balance for Year 1:

Year 1 Current Account Balance = -$7,515,600 + $2,768,774 + $1,556,500 +( -$1,808,433)

When the trade balance is equal to zero, it means that:

a nation is neither a net borrower nor lender A trade balance of zero means that imports = exports; which means that a nation is neither a net borrower nor lender in the international economy.

If a recession occurs after an economy has been running trade deficits, it may _______________.

become difficult to repay the international community that invested in the economy • If a recession occurs after an economy has been running trade deficits, it would find it harder to repay the international community. Mexico and Brazil are an example of this phenomenon. They ran large trade deficits and borrowed heavily from abroad in the 1970s, but the inflow of financial capital did not boost productivity sufficiently, which meant that these countries faced enormous troubles repaying the money borrowed when economic conditions shifted during the 1980s.

If a country _____________ after ___________, it may be able to repay the debt it had accumulated.

runs trade surpluses; running trade deficits • If a country runs trade surpluses after running trade deficits, it may be able to repay the debt it had accumulated. As an example: South Korea had trade deficits during much of the 1970s—and so was an importer of capital over that time. However, South Korea also had high rates of investment in physical plant and equipment, and its economy grew rapidly. From the mid-1980s into the mid-1990s, South Korea often had trade surpluses—that is, it was repaying its past borrowing by sending capital abroad.

A current account deficit means that _________________________.

the country is a net borrower from the rest of the world Generally, a current account deficit implies that the value of an economy's imports is greater than the value of its exports. A current account deficit means that, after taking all the flows of payments from goods, services, and income together, the country is a net borrower from the rest of the world - there is more money leaving the country than there is coming in or staying.