A country exports $900 billion of goods and $400 billion of services. It imports $1,100 billion of goods and $250 billion of services. What is its merchandise trade balance?
-$200 billion
✓
-$50 billion
$150 billion
$200 billion
Correct Answer
-$200 billion
The merchandise trade balance counts goods only: $900 billion - $1,100 billion = -$200 billion, a merchandise trade deficit. A balance of -$50 billion is the balance on goods and services combined. A balance of $150 billion is the services balance alone. A balance of $200 billion has the right size but the wrong sign.
Category: Measuring Trade Balances
Question 2
A country's current account shows a goods balance of -$500 billion, a services balance of +$150 billion, net income payments of +$100 billion, and net unilateral transfers of -$50 billion. What is its current account balance?
-$350 billion
-$300 billion
✓
-$200 billion
-$250 billion
Correct Answer
-$300 billion
The current account adds all four parts: -500 + 150 + 100 - 50 = -$300 billion. A balance of -$350 billion counts only goods and services, which is the balance of trade. A balance of -$200 billion treats the transfers as a positive entry. A balance of -$250 billion leaves out the unilateral transfers.
Category: Measuring Trade Balances
Question 3
A country exports $600 billion of goods and services, and its GDP is $4,000 billion. What are its exports as a percentage of GDP?
1.5%
60%
15%
✓
85%
Correct Answer
15%
Exports as a share of GDP equal 600 / 4,000 = 0.15, or 15%. A figure of 1.5% misplaces the decimal point. A figure of 60% mistakes the 600 for a percentage. A figure of 85% is the share of GDP that is not exported, not the export share.
Category: Level of Trade
Question 4
A country has private saving of $700 billion, domestic investment of $900 billion, and a government budget deficit of $100 billion. According to the national saving and investment identity, how large is its trade deficit?
$200 billion
$100 billion
$1,700 billion
$300 billion
✓
Correct Answer
$300 billion
Demand for financial capital is investment plus government borrowing, 900 + 100 = $1,000 billion, while domestic private saving supplies only $700 billion, so foreign capital must fill a $300 billion gap, which equals the trade deficit. A deficit of $200 billion ignores the government's borrowing. A deficit of $100 billion subtracts the budget deficit instead of adding it. A figure of $1,700 billion simply adds all three numbers together.
Category: Saving and Investment Identity
Question 5
A worker in the United States sends money each month to family members in another country and receives no good or service in return. How is this payment classified in the U.S. current account?
Unilateral transfer
✓
Income payment
Service import
Financial capital inflow
Correct Answer
Unilateral transfer
A unilateral transfer is a one-way payment, such as foreign aid or money sent to relatives abroad, with nothing received in exchange; for the United States these are counted like imports. An income payment is a return earned on an investment, such as interest or dividends. A service import requires buying a service from abroad. A financial capital inflow is money coming into the country to buy assets, not money sent out.
Category: Measuring Trade Balances
Question 6
In net terms, what is a country doing when it runs a current account deficit?
Lending to the rest of the world
Borrowing from the rest of the world
✓
Repaying its past foreign debts
Balancing its government budget
Correct Answer
Borrowing from the rest of the world
A current account deficit means the country pays out more than it takes in, and the difference is covered by a net inflow of foreign financial capital, so it is a net borrower. Lending to the rest of the world describes a current account surplus. Repaying its past foreign debts is also associated with running a surplus. Balancing its government budget concerns taxes and spending, not the current account.
Category: Financial Capital Flows
Question 7
According to the national saving and investment identity, if domestic investment rises while private saving and the government budget balance stay the same, what happens to the trade deficit?
It shrinks by the same amount
It stays the same
It grows by the same amount
✓
It becomes a trade surplus
Correct Answer
It grows by the same amount
The extra investment must be financed, and with domestic saving unchanged the funds must come from abroad, so the trade deficit rises by the same amount; this happened in the late 1990s U.S. investment boom. It shrinks by the same amount reverses the direction. It stays the same would break the identity, which must hold. It becomes a trade surplus would require saving to exceed investment, the opposite of what happened.
Category: Saving and Investment Identity
Question 8
Which characteristic tends to give a country a higher level of trade, measured as exports relative to GDP?
A very large domestic economy
Few nearby trading partners
Strict limits on imports
A long history of established trade
✓
Correct Answer
A long history of established trade
Countries with long-standing trade patterns tend to trade more, along with countries that are small and have close neighbors. A very large domestic economy lowers the ratio because much trade happens within the country's own borders. Few nearby trading partners raises transportation and communication costs. Strict limits on imports hold trade down, as in countries that have often restricted trade.
Category: Level of Trade
Question 9
Which transaction counts as a U.S. export of services?
A U.S. law firm advising a client in France
✓
A U.S. farm shipping soybeans to China
A U.S. company paying dividends to a Japanese investor
A U.S. charity sending aid to a foreign country
Correct Answer
A U.S. law firm advising a client in France
Legal advice is an intangible service, and selling it to a foreign client is a service export. A U.S. farm shipping soybeans to China is a merchandise export, since soybeans are physical goods. A U.S. company paying dividends to a Japanese investor is an income payment flowing out of the country. A U.S. charity sending aid to a foreign country is a unilateral transfer.
Category: Measuring Trade Balances
Question 10
A U.S. investor receives dividends from shares she owns in a German company. How is this recorded in the U.S. current account?
As an import of services
As a positive income receipt
✓
As a unilateral transfer
As a merchandise export
Correct Answer
As a positive income receipt
Income earned by U.S. residents on investments abroad flows into the United States and enters the current account as a positive income entry. An import of services would involve buying a service from abroad. A unilateral transfer is a one-way payment with nothing given in return, while dividends are a return on an investment. A merchandise export involves shipping physical goods.
Category: Measuring Trade Balances
Question 11
Why do economists often express a trade balance as a share of GDP when comparing different years?
It converts the balance into goods only
It removes the effect of services
It adjusts for inflation and economic growth
✓
It makes every deficit look smaller
Correct Answer
It adjusts for inflation and economic growth
Dollar figures grow over time partly because prices rise and the economy expands, so dividing by GDP gives a measure that can be compared fairly across years. It converts the balance into goods only is wrong because the share of GDP does not change what the balance covers. It removes the effect of services is wrong for the same reason. It makes every deficit look smaller is not the goal; the ratio puts deficits in proportion to the size of the economy.
Category: Measuring Trade Balances
Question 12
According to the national saving and investment identity, a country that runs persistent trade surpluses must have what?
Domestic investment that exceeds national saving
A large government budget surplus
Exports made up mostly of services
National saving that exceeds domestic investment
✓
Correct Answer
National saving that exceeds domestic investment
A trade surplus is a net outflow of financial capital, which is possible only when private and public saving together exceed what is invested at home; Japan's surpluses reflect very high saving. Domestic investment that exceeds national saving would produce a trade deficit. A large government budget surplus is not required, since high private saving can produce the gap even with a budget deficit. Exports made up mostly of services says nothing about the overall balance.
Category: Saving and Investment Identity
Question 13
If the government budget deficit grows while private saving and investment do not change, what does the national saving and investment identity predict?
A larger trade deficit
✓
A larger trade surplus
No change in the trade balance
A balanced current account
Correct Answer
A larger trade deficit
Extra government borrowing raises the demand for financial capital, and with private saving and investment unchanged the added funds must come from abroad, which means a larger trade deficit. The mid-1980s U.S. experience fits this pattern. A larger trade surplus would mean capital flowing out, the opposite direction. No change in the trade balance would leave the identity unbalanced. A balanced current account would require no net foreign borrowing at all.
Category: Saving and Investment Identity
Question 14
From 1831 to 1875 the United States ran trade deficits in most years. How was much of the foreign financial capital that flowed in used?
To pay for military spending
To build railroads and other productive projects
✓
To fund unemployment benefits
To repay older foreign loans
Correct Answer
To build railroads and other productive projects
Foreign financial capital was mostly invested in projects such as railroads that brought a substantial economic payoff, so these deficits helped the economy. Paying for military spending was not the main use of the inflows. Funding unemployment benefits does not describe the period, which had no such federal program. Repaying older foreign loans would have required trade surpluses, not deficits.
Category: Pros and Cons of Deficits
Question 15
In 1997 and 1998, Thailand, Indonesia, Malaysia and South Korea fell into deep recessions. What triggered the trouble?
Their trade surpluses grew too large
Their governments banned all imports
Foreign investors rapidly pulled their money out
✓
Their currencies were tied to gold
Correct Answer
Foreign investors rapidly pulled their money out
These economies had run large trade deficits financed by foreign capital, and when foreign investors grew worried they quickly withdrew funds from stocks, bonds, real estate and banks, staggering their banking systems. Their trade surpluses grew too large is wrong because they had been running deficits. Their governments banned all imports did not happen. Their currencies were tied to gold does not describe these economies in the 1990s.
Category: Pros and Cons of Deficits
Question 16
The United States exports a relatively small share of its GDP yet has run large trade deficits. What does this show?
Large economies must run trade deficits
Exports and GDP are measured in different units
Trade deficits require a high level of trade
The level of trade and the trade balance are separate
✓
Correct Answer
The level of trade and the trade balance are separate
How much a country trades relative to its GDP and whether its trade is in surplus or deficit are different questions with different causes. Large economies must run trade deficits is wrong, since Japan is large and has run surpluses. Exports and GDP are both measured in dollars, so they are in the same units. Trade deficits require a high level of trade is contradicted by the U.S. case itself.
Category: Level of Trade
Question 17
During a recession, a country's trade deficit tends to shrink. Which explanation fits this pattern?
Imports fall as domestic spending drops
✓
Exports rise as domestic spending drops
Foreign capital floods into the country
The government stops collecting tariffs
Correct Answer
Imports fall as domestic spending drops
When incomes and spending fall in a recession, households and firms buy fewer goods from abroad, so imports drop more than exports and the deficit narrows, as U.S. deficits did from 2006 to 2009. Exports rise as domestic spending drops is wrong because exports depend on foreign, not domestic, spending. Foreign capital flooding in would accompany a larger deficit, not a smaller one. The government stops collecting tariffs does not happen in recessions.
Category: Saving and Investment Identity
Question 18
Which transaction is an example of a financial capital inflow to the United States?
A U.S. firm building a factory in Mexico
A Canadian pension fund buying U.S. corporate stock
✓
A U.S. tourist paying for a hotel in Rome
A U.S. company importing cars from Korea
Correct Answer
A Canadian pension fund buying U.S. corporate stock
Financial capital flows include private purchases of stocks, bonds, real estate and companies across borders, so foreign money buying U.S. stock is an inflow. A U.S. firm building a factory in Mexico is a financial capital outflow. A U.S. tourist paying for a hotel in Rome is an import of services. A U.S. company importing cars from Korea is a merchandise import.
Category: Financial Capital Flows
Question 19
A country has private saving of $500 billion, a government budget surplus of $50 billion, and domestic investment of $450 billion. According to the national saving and investment identity, what is its trade balance?
$100 billion deficit
$50 billion surplus
$100 billion surplus
✓
$1,000 billion surplus
Correct Answer
$100 billion surplus
National saving is private saving plus the budget surplus, 500 + 50 = $550 billion, while domestic investment uses only $450 billion, so the extra $100 billion flows abroad as a net capital outflow, which equals a trade surplus. A $100 billion deficit has the right size but the wrong sign. A $50 billion surplus ignores the government's budget surplus. A $1,000 billion surplus simply adds the three numbers together.
Category: Saving and Investment Identity
Question 20
Several Latin American countries borrowed heavily from abroad in the 1970s and struggled to repay in the 1980s. What made this borrowing harmful?
They ran trade surpluses instead of deficits
They spent the funds only on railroads
They stopped trading with their neighbors
The borrowed funds did not raise productivity enough
✓
Correct Answer
The borrowed funds did not raise productivity enough
Foreign borrowing pays off only when it finances investment that raises future output enough to repay the loans, and these inflows did not boost productivity sufficiently. They ran trade surpluses instead of deficits is wrong because heavy borrowing came with large deficits. They spent the funds only on railroads does not describe this episode. They stopped trading with their neighbors does not explain a debt problem.
Category: Pros and Cons of Deficits