Balance of Payments Quiz

A country has a surplus on the current account of its balance of payments. What would be most likely to cause the country to move into deficit?

• devaluation of its fixed exchange rate

• government subsidies to its exporters

• improved technology in other countries

• productivity increases in its export industries

Answer explanation

Devaluation of its fixed exchange rate would make the country's exports cheaper, leading to an increase in exports and a shift from surplus to deficit on the current account.

The table shows some economic indicators. Which increase in the first indicator is most likely to lead to an increase in the second indicator?

• budget surplus - consumer saving

• consumer spending - unemployment

• inflation - trade surplus

• productivity - living standards

Answer explanation

Productivity improvements lead to increased output per worker, which can result in higher wages and better living standards for individuals.

A person in country X receives a dividend payment on shares that they hold in a firm in country Y. In which section of the current account of the balance of payments for country X will this dividend appear?

• primary income

• secondary income

• trade in goods

• trade in services

Answer explanation

The dividend payment received on shares from a firm in country Y will appear in the primary income section of the current account of the balance of payments for country X.

A country has a deficit on its current account of its balance of payments. What could increase the size of its deficit?

• increased exports of its services

• increased international competitiveness of its goods

• increased numbers of visitors from abroad

• increased spending on its military bases abroad

Answer explanation

Increased spending on its military bases abroad could increase the size of the deficit by adding to the country's expenses without directly contributing to export revenue.

What may result from a balance of payments trade surplus?

• The exchange rate appreciates and causes export prices to fall.

• The exchange rate appreciates and causes export prices to rise.

• The exchange rate depreciates and causes export prices to fall.

• The exchange rate depreciates and causes export prices to rise.

Answer explanation

A balance of payments trade surplus leads to an appreciation of the exchange rate, making export prices rise.

A country experienced a deficit on each of its trade in goods, primary income and secondary income. Overall, it had a surplus on the current account of its balance of payments. What must this mean?

• It had a floating exchange rate.

• It had a surplus on its trade in services.

• It had a surplus on the government's budget.

• It was a low-income country.

Answer explanation

The correct choice is that the country had a surplus on its trade in services, which contributed to an overall surplus on the current account of its balance of payments.

A country has a current account deficit on its balance of payments. Which measure is most likely to reduce the deficit?

• A cut in interest rates

• A cut in the rate of income tax

• A depreciation of the exchange rate

• An increase in government expenditure

Answer explanation

A depreciation of the exchange rate is most likely to reduce the current account deficit by making exports cheaper and imports more expensive, thus improving the trade balance.

The diagrams show the composition of exports and imports of a country. What is true for this country?

• There is a deficit in the balance of trade in goods.

• There is a deficit in the balance of trade in services.

• There is a surplus in the balance of trade in goods.

• There is a surplus in the balance of trade in services.

Answer explanation

The country has a deficit in the balance of trade in goods.

What would not be included in the current account of the balance of payments?

• dividends earned from a firm in another country

• imports of TVs from another country

• purchase of a house in another country

• rents paid to owners of land in another country

Answer explanation

The purchase of a house in another country would not be included in the current account of the balance of payments as it falls under the capital account.

What was the country's balance of trade in goods and services?

• a deficit of $7 million

• a deficit of $13 million

• a surplus of $7 million

• a surplus of $13 million

Answer explanation

The correct answer is a deficit of $13 million because the country's balance of trade in goods and services was negative by $13 million.