2.1.4 Balance of payments Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. The current account of the balance of payments records:

   • only the net trade in manufactured goods and raw materials
   • only the flows of foreign direct investment into the country
   • only the changes in the foreign exchange reserves of the central bank
   • trade in goods and services, primary income and secondary income flows

2. Which of the following is recorded in the financial account rather than the current account?

   • the export of cars to the United States
   • the payment of interest on a foreign bond held by a UK resident
   • the purchase of shares in a UK company by an overseas investor
   • the transfer of money from a UK worker to family abroad

3. A current account deficit means that:

   • the government has borrowed more than it collected in taxes, so the public sector deficit is larger than the trade deficit
   • the value of exports is higher than the value of imports in the period, so the country earns more from trade than it pays overseas
   • the central bank has raised its foreign currency reserves by buying overseas assets, which adds to its reserve stock
   • the value of imports of goods and services plus net income outflows exceeds the value of exports

4. A persistent current account deficit must be financed by:

   • an automatic fall in the exchange rate to zero, which removes the deficit because imports become free of charge for buyers
   • an increase in tax revenue from exporters, which is then used to buy foreign goods and so pays the import bill directly
   • a rise in the government budget surplus, which automatically offsets the trade deficit by recycling tax receipts abroad
   • a surplus on the financial and capital account, meaning net inflows of foreign investment or borrowing

5. Which relationship between the current account and other macroeconomic objectives is most accurate?

   • A surplus always causes an immediate rise in inflation, because it raises the money supply and pushes up all prices
   • The current account has no effect on growth since it records only financial flows, so trade and income have no bearing on output
   • A current account deficit always lowers unemployment and raises inflation in equal measure, so the two effects cancel out
   • A persistent large deficit can affect exchange rates and growth, and may coincide with higher borrowing from abroad

6. An appreciation of sterling, all else being equal, is most likely to:

   • leave the trade balance unchanged because prices are fixed in the short run, so exchange rate movements never affect trade volumes
   • raise the price of imports and improve the trade balance immediately, since UK buyers switch to domestic goods straight away
   • make UK exports cheaper abroad and raise the current account surplus, because foreign buyers pay less for British products
   • make UK exports more expensive abroad and imports cheaper, worsening the trade balance

7. Interconnectedness of economies through trade means that:

   • global demand has no effect on exports if domestic demand is strong
   • a slowdown in one major trading partner can reduce demand for a country's exports
   • each country's economy is entirely self-sufficient and unaffected by others
   • trade only affects the economy of the exporting country and never the importer

8. A UK current account surplus of 20 billion pounds, with the primary income balance unchanged, would imply that:

   • UK residents bought 20 billion pounds more foreign shares than they sold, so the financial account is in surplus by the same amount
   • the Bank of England had reduced its foreign currency reserves by 20 billion pounds, which is the only way a surplus can arise
   • the UK exported more goods and services than it imported, net of income flows, over the period
   • the UK government had a budget surplus of 20 billion pounds, so tax receipts exceeded public spending by the same amount

9. Which of the following would be recorded as a credit in the UK current account?

   • a UK firm pays a dividend to overseas shareholders
   • a UK resident buys imported cars from Japan
   • a UK bank lends money to an overseas company
   • a UK firm exports software services to a buyer in Germany

10. Trade in services is included in the current account. Which example is a service export from the UK?

    • UK imports of crude oil from Norway
    • tourism spending by overseas visitors in London hotels
    • UK residents buying holiday homes abroad
    • the transfer of foreign shares to a UK pension fund

11. Which factor is most likely to reduce a current account deficit over time?

    • a rise in imported energy prices with unchanged export volumes
    • an increase in consumer spending on imports due to higher incomes
    • a rise in the exchange rate that makes exports more expensive
    • a fall in the exchange rate that makes exports cheaper and imports dearer

12. A country has exports of 300 billion, imports of 340 billion, net primary income of +10 billion and net secondary income of -5 billion. What is the current account balance?

    • -15 billion
    • -45 billion
    • -35 billion
    • +35 billion

13. A country has trade in goods and services of -20 billion and primary income of +5 billion. Which is its current account before secondary income?

    • -15 billion
    • +25 billion
    • -25 billion
    • +15 billion

14. Which measure of the balance of payments is used to show whether the current account is financed by net capital flows?

    • the capital and financial account balance, which should offset the current account in total
    • the primary income balance, which records only wage flows between the UK and overseas workers and excludes investment returns
    • the GDP deflator, which records the price of imports and exports relative to domestic output over time
    • the trade in services balance, which records only tourism and the sale of financial services to overseas customers

15. Why might a large and persistent UK current account deficit concern policymakers?

    • It may signal low competitiveness and dependence on foreign borrowing, which can make the economy vulnerable to capital flight
    • It shows that domestic saving always exceeds investment, so the economy is accumulating foreign assets and needs no policy response
    • It guarantees that the exchange rate will rise continuously over time, because a deficit always raises the value of the currency
    • It proves that the economy is growing too slowly and needs more imports, since a deficit always shows weak demand

16. Which best explains how a fall in world demand affects the UK current account?

    • The current account is unaffected because it records only financial flows
    • UK imports rise because foreigners buy more UK goods and services
    • The UK financial account must deteriorate by the same amount as exports fall
    • UK exports fall in value, so the trade balance may deteriorate, depending on import behaviour

17. Which statement best evaluates the view that a current account deficit is always harmful?

    • A deficit may be harmless if it reflects high investment financed by inflows that raise future productive capacity
    • A deficit is always beneficial because it means the economy has spare resources to repay debts owed to other countries
    • A deficit is always harmful because it shows the country spends too much on imports, so policy should eliminate it every year
    • A deficit is irrelevant because the current account has no effect on any other objective, so governments should ignore it

18. A country's exports are 200 billion and its imports are 180 billion. Which best describes its trade balance?

    • a deficit of 20 billion
    • a surplus of 380 billion
    • a balanced trade position with zero net flows
    • a surplus of 20 billion

19. Which item is part of net primary income in the current account?

    • the value of goods exported to European Union member states, recorded as a credit under trade in goods in the current account
    • dividends and interest earned by UK residents on overseas investments, net of payments to foreign owners
    • remittances sent to family abroad by migrant workers, recorded as a payment to overseas households under primary income
    • the purchase of foreign government bonds by the Bank of England, recorded in the financial account as a change in official reserves

20. A rise in UK inflation relative to trading partners, with the exchange rate fixed, would most likely:

    • raise the exchange rate automatically to restore the balance of trade
    • reduce UK price competitiveness and worsen the current account over time
    • have no effect on exports since demand is price inelastic in all markets
    • improve competitiveness because domestic prices are higher than abroad

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