The merchandise trade balance counts only trade in physical goods, not trade in services.
Correct Answer
True
True. The merchandise trade balance is goods exports minus goods imports. The broader balance of trade adds services, and the current account is broader still.
Category: Measuring Trade Balances
Question 2
The current account balance includes only exports and imports of goods and services.
Correct Answer
False
False. The current account also includes income payments on investments and unilateral transfers. The balance on goods and services alone is the balance of trade.
Category: Measuring Trade Balances
Question 3
Services such as banking, software, and consulting can be exported just as physical goods can.
Correct Answer
True
True. When a foreign buyer pays a domestic firm for a service, that is a service export. In high-income economies such as the United States, services now make up more than half of production.
Category: Measuring Trade Balances
Question 4
Foreign aid that the U.S. government sends abroad is recorded like an export in the U.S. current account.
Correct Answer
False
False. Unilateral transfers sent abroad, such as foreign aid, are counted like imports because money flows out with nothing received in return. That is why net unilateral transfers are almost always negative for the United States.
Category: Measuring Trade Balances
Question 5
Since the early 1980s, the United States has run trade deficits in most years.
Correct Answer
True
True. U.S. trade deficits grew rapidly in the 1980s and, apart from a brief near-balance around 1991, have continued since. They have been large both in dollars and as a share of GDP.
Category: Measuring Trade Balances
Question 6
For most years since the 1980s, Japan has run current account deficits.
Correct Answer
False
False. Japan has typically run current account surpluses in recent decades. Its very high domestic saving exceeds its domestic investment, so it sends financial capital abroad.
Category: Pros and Cons of Deficits
Question 7
A trade deficit is matched by a net inflow of financial capital from abroad.
Correct Answer
True
True. When a country buys more from abroad than it sells, foreigners end up holding the extra dollars, which flow back as investment in the country's assets. So a trade deficit and a net capital inflow are two sides of the same transactions.
Category: Financial Capital Flows
Question 8
Financial capital flows between countries consist only of loans to governments.
Correct Answer
False
False. Financial capital flows include private investment in stocks, bonds, real estate and whole companies, as well as lending to governments. Much of the foreign capital entering the United States is private investment.
Category: Financial Capital Flows
Question 9
In the national saving and investment identity, a government budget surplus adds to the supply of financial capital.
Correct Answer
True
True. When taxes exceed government spending, public saving is positive and the government supplies funds to financial markets. The United States ran budget surpluses from 1998 to 2001.
Category: Saving and Investment Identity
Question 10
According to the national saving and investment identity, a rise in private saving, with investment and the budget balance unchanged, enlarges the trade deficit.
Correct Answer
False
False. More private saving means less financial capital is needed from abroad, so the identity predicts a smaller trade deficit. That is why higher private saving is often proposed as a way to reduce trade deficits.
Category: Saving and Investment Identity
Question 11
From the perspective of the national saving and investment identity, a country's trade balance reflects the gap between its domestic saving and its domestic investment.
Correct Answer
True
True. Rearranging the identity shows that a trade deficit arises when investment exceeds national saving, and a surplus when saving exceeds investment. In this view, the trade balance is a macroeconomic outcome rather than a result of how particular industries perform.
Category: Saving and Investment Identity
Question 12
In the mid-1980s, a rising U.S. budget deficit coincided with the current account moving from deficit into surplus.
Correct Answer
False
False. In the mid-1980s the federal budget deficit grew sharply and the current account moved from a small surplus into a large deficit. Foreign investors supplied much of the financial capital the government borrowed.
Category: Saving and Investment Identity
Question 13
A trade deficit can benefit a country if the inflow of foreign capital is invested in ways that raise long-run productivity.
Correct Answer
True
True. Like a student borrowing for an education that raises future earnings, a country can borrow from abroad and end up better off if the funds go to productive investment. The United States did this in the 1800s.
Category: Pros and Cons of Deficits
Question 14
Japan's large trade surpluses after 1990 coincided with rapid economic growth.
Correct Answer
False
False. Despite running large surpluses, Japan grew slowly after 1990, averaging only about 1% per year for long stretches. A trade surplus does not by itself signal a healthy economy.
Category: Pros and Cons of Deficits
Question 15
Large economies such as the United States tend to export a smaller share of GDP than small economies, because more of their trade can take place within their own borders.
Correct Answer
True
True. A large economy can buy much of what it needs from domestic producers, so its exports relative to GDP are low. Small economies such as Sweden rely more heavily on trade with other countries.
Category: Level of Trade
Question 16
A trade deficit means the government is spending more than it collects in taxes.
Correct Answer
False
False. A trade deficit means a country's imports exceed its exports. A government spending more than it collects in taxes is running a budget deficit, a separate concept, although the two can be linked through the saving and investment identity.
Category: Measuring Trade Balances
Question 17
In the 1960s, the United States generally ran small trade surpluses.
Correct Answer
True
True. Through the 1960s U.S. exports usually exceeded imports by a small margin. Large and persistent deficits did not begin until the 1980s.
Category: Measuring Trade Balances
Question 18
A country runs a trade surplus when the value of its imports exceeds the value of its exports.
Correct Answer
False
False. A trade surplus occurs when exports exceed imports. When imports exceed exports, the country has a trade deficit.
Category: Measuring Trade Balances
Question 19
A zero trade balance means a country is neither a net borrower from nor a net lender to the rest of the world.
Correct Answer
True
True. Because trade flows are matched by financial capital flows, balanced trade means no net capital flows in or out. Like a surplus or a deficit, a zero balance can be good or bad depending on the country's circumstances.
Category: Financial Capital Flows
Question 20
Most U.S. economic output consists of physical goods rather than services.
Correct Answer
False
False. In the United States and other high-income economies, services make up more than half of production. This is one reason broad measures such as the current account matter more than the goods-only merchandise balance.
Category: Measuring Trade Balances