Balance of Payments: Definition, Components, and Importance

Question 1

Which of the following is NOT included in the current account of the balance of payments?

Accepted Answer

Capital transfers

Answer

Goods

Answer

Services

Answer

Interest payments

Question 2

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

Accepted Answer

Capital account

Answer

Goods and services

Answer

Investment income

Answer

Unilateral transfers

Question 3

Which of the following transactions is recorded in the capital account?

Accepted Answer

Purchase of foreign assets

Answer

Export of goods

Answer

Import of services

Answer

Sale of domestic bonds

Question 4

A country with a balanced current account and a capital account surplus will:

Accepted Answer

Experience a net inflow of foreign capital

Answer

Experience a net outflow of foreign capital

Answer

Have no change in its overall balance of payments

Answer

Can't be determined from the given information

Question 5

The overall balance of payments is classified as a:

Accepted Answer

Flow account

Answer

Stock account

Answer

Neither of the above

Answer

Both of the above

Question 6

A country with a surplus in its overall balance of payments is likely experiencing:

Accepted Answer

Net capital inflow

Answer

Net capital outflow

Answer

No change in its net foreign asset position

Answer

Not enough information to determine

Question 7

Which of the following is NOT a component of the current account in the overall balance of payments?

Accepted Answer

Net Foreign Investment

Answer

Exports of Goods

Answer

Imports of Services

Question 8

A deficit on the current account means that:

Accepted Answer

Imports of goods and services are exceeding exports.

Answer

A country is saving more than it is investing.

Answer

The private sector is growing faster than the public sector.

Answer

Exporters are receiving more revenue than importers.

Question 9

The overall balance of payments is calculated as:

Accepted Answer

The sum of the current account and the capital account.

Answer

Only the current account.

Answer

The difference between the current account and the capital account.

Question 10

What is the main significance of the overall balance of payments?

Accepted Answer

It provides a summary of a country's economic transactions with the rest of the world.

Answer

It determines the exchange rate of a currency.

Answer

It is a measure of a country's economic growth.

Question 11

Which of the following can lead to a depreciation of the exchange rate?

Accepted Answer

A current account deficit

Answer

A high level of foreign investment

Answer

A budget surplus

Answer

A capital account surplus

Question 12

What is a potential problem associated with a persistent current account deficit?

Accepted Answer

It can lead to a loss of economic independence and increased foreign debt.

Answer

It reduces the rate of economic growth.

Answer

It causes inflation.

Question 13

Which of the following is a component of the current account in the balance of payments?

Accepted Answer

Exports of goods

Answer

Loans to foreign governments

Answer

Sale of foreign currency

Answer

Purchase of foreign bonds

Question 14

What is the primary purpose of the capital account in the balance of payments?

Accepted Answer

To record transactions involving long-term investments and financial assets

Answer

To monitor the flow of short-term capital

Answer

To measure the trade balance

Question 15

A country with a positive balance of payments is most likely to experience which of the following?

Accepted Answer

Appreciation of its exchange rate

Answer

Recession

Answer

Negative current account

Answer

Trade deficit

Question 16

Which of the following transactions would be recorded as a credit entry in the capital account of the balance of payments?

Accepted Answer

Foreign direct investment in domestic companies

Answer

Repayment of foreign debt

Answer

Import of goods

Answer

Sale of domestic currency

Question 17

What is a trade deficit?

Accepted Answer

When the value of imports exceeds the value of exports

Answer

When the value of exports exceeds the value of imports

Answer

When the balance of payments is negative

Question 18

Which of the following is a benefit of a balanced balance of payments?

Accepted Answer

Stable exchange rates

Answer

Increased trade

Answer

Higher investment

Answer

Reduced inflation

Question 19

What is the relationship between the current account and the capital account in the balance of payments?

Accepted Answer

In the absence of statistical errors, the sum of the current account, the capital account must be zero.

Answer

The current account and the capital account are independent of each other

Answer

The current account and the capital account are always equal

Question 20

What is the significance of the balance of payments to policymakers?

Accepted Answer

It provides valuable insights into the health of an economy and its interactions with the rest of the world

Answer

It is only useful for tracking trade imbalances

Answer

It has no practical implications for economic policy

Question 21

What can cause a persistent deficit in the overall balance of payments?

Accepted Answer

Low domestic savings and high domestic investment

Answer

Stable exchange rates

Answer

A balanced budget

Answer

High exports and low imports

Question 22

What is the primary purpose of the overall balance of payments?

Accepted Answer

To provide a comprehensive summary of a country's economic transactions with the rest of the world

Answer

To determine the value of a country's currency

Answer

To measure a country's economic growth rate

Question 23

What is a potential consequence of a high level of foreign direct investment (FDI) in a country?

Accepted Answer

Increased economic growth and job creation

Answer

Higher inflation

Answer

Depreciation of the domestic currency

Answer

Reduced domestic investment

Question 24

Which of the following is NOT a component of the current account of the balance of payments?

Accepted Answer

Foreign direct investment

Answer

Exports of goods and services

Answer

Current transfers

Answer

Income from abroad

Question 25

What does a surplus in the overall balance of payments indicate?

Accepted Answer

A country is exporting more goods and services than it is importing, and receiving more foreign investment than it is making abroad

Answer

A country's foreign exchange reserves are decreasing

Answer

A country is importing more goods and services than it is exporting, and making more foreign investment than it is receiving

Question 26

How is the relationship between the current account and the capital account typically described?

Accepted Answer

They sum to zero for a country with no foreign exchange reserves

Answer

The current account is always positive if the capital account is negative

Answer

They are always equal in magnitude but opposite in sign

Question 27

Which of the following is a potential benefit of a current account surplus?

Accepted Answer

Appreciation of the domestic currency

Answer

Depletion of foreign exchange reserves

Answer

Reduced domestic investment

Answer

Higher inflation

Question 28

What is a key indicator of a country's external indebtedness?

Accepted Answer

Total foreign debt as a percentage of GDP

Answer

Foreign exchange reserves as a percentage of imports

Answer

Exports as a percentage of imports

Answer

Current account balance as a percentage of GDP

Question 29

Which of the following is NOT a component of the current account of the balance of payments?

Accepted Answer

Foreign direct investment

Answer

Transfers such as foreign aid

Answer

Exports of goods

Answer

Payment of interest on loans

Question 30

What does a deficit in the overall balance of payments indicate?

Accepted Answer

A country is importing more goods and services than it is exporting.

Answer

A country's currency is depreciating.

Answer

A country is lending more than it is borrowing.

Answer

A country's inflation rate is rising.

Question 31

Which of the following transactions would be recorded on the capital account of the balance of payments?

Accepted Answer

Purchase of foreign stocks and bonds

Answer

Export of a car

Answer

Remittance of wages to a foreign worker

Answer

Payment of interest on a loan

Question 32

What is the primary purpose of the overall balance of payments?

Accepted Answer

To provide a comprehensive record and summary of a country's economic transactions with the rest of the world.

Answer

To control inflation

Answer

To regulate the exchange rate of a currency.

Question 33

Which of the following is NOT a potential reason for a country to have a balance of payments surplus?

Accepted Answer

Capital flight

Answer

High foreign direct investment

Answer

Strong exports

Answer

Low imports

Question 34

Which of the following is NOT a primary component of the overall balance of payments?

Accepted Answer

National debt

Answer

Capital account

Answer

Current account

Answer

Financial account

Question 35

The current account records a country's transactions related to:

Accepted Answer

Trade in goods and services, income, and current transfers

Answer

Capital flows

Answer

Changes in foreign exchange reserves

Answer

Foreign direct investment

Question 36

A positive balance on the capital and financial accounts indicates:

Accepted Answer

Capital inflows

Answer

Capital outflows

Answer

A current account deficit

Answer

A trade deficit

Question 37

The overall balance of payments is in equilibrium when:

Accepted Answer

The sum of the current account and capital and financial accounts is zero

Answer

The capital account surplus equals the current account deficit

Answer

The current account surplus equals the capital account deficit

Question 38

A country with a persistent current account deficit is likely to experience:

Accepted Answer

Depreciation of its currency

Answer

Increased foreign direct investment

Answer

Appreciation of its currency

Question 39

The overall balance of payments is a valuable tool for:

Accepted Answer

Assessing a country's external economic position and international competitiveness

Answer

Predicting future exchange rates

Answer

Setting monetary policy

Answer

Controlling inflation

Question 40

Which of the following is NOT a factor that can influence the overall balance of payments?

Accepted Answer

Only government spending

Answer

Monetary policy

Answer

Fiscal policy

Answer

Exchange rates

Question 41

A country with a trade surplus and a capital account deficit may experience:

Accepted Answer

Appreciation of its currency

Answer

Depreciation of its currency

Answer

Inflation

Answer

Recession

Question 42

The World Trade Organization (WTO) monitors the overall balance of payments of its member countries to:

Accepted Answer

Identify and address trade imbalances

Answer

Provide loans to countries in need

Answer

Set exchange rates

Question 43

Which of the following is a potential benefit of a current account surplus?

Accepted Answer

Increased national savings

Answer

Reduced economic growth

Answer

Higher inflation

Answer

Currency depreciation

Question 44

Which of the following is a key component of the current account in the balance of payments?

Accepted Answer

Exports of goods and services

Answer

Foreign direct investment

Answer

Portfolio investments

Answer

Bank loans

Question 45

Which of the following factors does NOT influence the capital account of the balance of payments?

Accepted Answer

Fiscal policy interest rates

Answer

Government intervention

Answer

Exchange rate expectations

Answer

Foreign investment

Question 46

What is the primary purpose of compiling the overall balance of payments?

Accepted Answer

To provide a comprehensive summary of a country's economic transactions with the rest of the world.

Answer

To determine the value of a country's currency.

Answer

To control the flow of foreign currency into and out of a country.

Question 47

How does the overall balance of payments potentially influence the exchange rate?

Accepted Answer

It can affect the demand for a country's currency, leading to fluctuations in the exchange rate.

Answer

The exchange rate is solely determined by market forces.

Question 48

Why is the overall balance of payments significant for policymakers?

Accepted Answer

It provides insights into a country's economic health and guides policy decisions.

Answer

It has no practical relevance for policymakers.

Answer

It is primarily useful for statistical purposes.

Question 49

Which characteristics are indicative of a robust overall balance of payments?

Accepted Answer

Low external debt and a stable exchange rate

Answer

High imports and low exports

Answer

Large current account deficits

Answer

Volatile capital inflows and outflows

Question 50

How does the balance of trade differ from the current account?

Accepted Answer

The balance of trade only considers goods, whereas the current account encompasses both goods and services.

Answer

The current account is a narrower measure than the balance of trade.