2.2.5 Net trade (X-M) Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Net trade is calculated as:

   • the value of exports minus the value of imports of goods and services
   • the value of exports minus government expenditure on imports
   • the value of imports minus the value of exports
   • the value of exports plus the value of imports

2. Which is a non-price factor affecting UK exports?

   • the exchange rate between sterling and the euro
   • the quality, design and reliability of the goods and services produced
   • the rate of inflation in the UK relative to its trading partners
   • the price of UK goods relative to competitors' prices

3. A rise in real income in the UK, all else equal, is most likely to:

   • leave imports unchanged because income does not affect demand for imports
   • increase exports, improving the net trade balance
   • reduce imports, improving the net trade balance
   • increase imports, worsening the net trade balance

4. Depreciation of sterling is most likely to:

   • make exports cheaper for foreign buyers and imports more expensive for UK buyers
   • make exports more expensive for foreign buyers and imports cheaper
   • leave the price of imports and exports unchanged in all cases
   • increase the price of exports and reduce the price of imports

5. Which factor is most likely to reduce UK exports as a result of a slowdown abroad?

   • real income in the UK, since UK households buy more of what foreigners sell
   • the state of the world economy, since slower growth abroad increases demand for UK exports
   • the degree of protectionism, since tariffs fall during a global slowdown
   • the state of the world economy, since weaker demand in trading partners reduces import demand for UK goods

6. Protectionism is most likely to affect the trade balance by:

   • increasing the volume of imports by reducing trade barriers
   • having no effect because trade barriers only affect services
   • raising the price of imports through tariffs or quotas, reducing the volume of imports
   • lowering the price of imports through subsidies paid to foreign firms

7. A UK firm's exports are priced in euros and the euro depreciates by 10% against sterling. Assuming the price in euros is unchanged, what happens to the sterling value of those exports?

   • The sterling value of the exports is unchanged
   • The sterling value of the exports falls by 100%
   • The sterling value of the exports falls by about 10%
   • The sterling value of the exports rises by about 10%

8. Why might a UK currency appreciation have a smaller effect on the net trade balance than expected?

   • Exchange rate changes affect only the financial account, not trade, because currency moves have no link to traded goods prices
   • Trade always responds immediately and fully to exchange rate changes, so any appreciation shows up in volumes at once
   • Import prices never change when the exchange rate moves, because importers absorb currency swings in their own margins
   • Demand for imports and exports may be price inelastic, so volumes change little in the short run

9. Which of these is an example of an influence on net trade that is a non-price factor?

   • a rise in the exchange rate that makes UK exports dearer
   • a rise in the inflation rate of trading partners
   • a fall in the sterling price of imported cars
   • a rise in the reputation and brand loyalty of UK exporters

10. Which statement best describes the effect of a rise in world incomes on UK net trade?

    • UK exports tend to rise, improving net trade, if UK goods are in demand abroad
    • UK imports fall because foreign incomes rise, which reduces the price of imports
    • UK net trade is unaffected by world incomes since trade depends only on exchange rates
    • UK exports fall because foreign households buy fewer UK goods when their incomes rise

11. A current account surplus caused by net exports adds to AD. Which statement is the most accurate evaluation?

    • A net export surplus always lowers the price level because foreign buyers pay less than domestic buyers for the same products
    • A net export surplus always reduces AD because exports leave the economy, so foreign demand takes spending away from domestic firms
    • A net export surplus has no effect on AD because exports are not domestic spending, so changes in trade never alter total demand
    • A net export surplus raises AD, but its sustainability depends on competitiveness and the strength of trading partners' demand

12. Which is the most likely effect of a fall in the level of protectionism on net trade?

    • a fall in imports as trade barriers are removed
    • a rise in imports as trade barriers are removed, which may worsen net trade in the short run
    • a rise in the exchange rate that lowers import prices
    • no effect since protectionism only affects services, while trade in goods is free of any tariffs, quotas or other barriers in every economy

13. If X = 300 billion and M = 340 billion, what is the value of net trade?

    • -640 billion
    • 640 billion
    • 40 billion
    • -40 billion

14. An economy has consumption of 600, investment of 150, government spending of 200, exports of 180 and imports of 230. What is AD?

    • 900
    • 1,130
    • 800
    • 1,000

15. Which change would most directly increase AD through net trade?

    • an increase in imports of consumer goods from abroad
    • an increase in foreign demand for UK exports, with imports unchanged
    • a rise in sterling that makes exports dearer for foreign buyers
    • a fall in foreign incomes that reduces demand for UK products

16. Which factor is most likely to lead to a long-run improvement in the net trade balance?

    • improvements in product quality and productivity that raise export competitiveness
    • a rise in trade protectionism by major partners, which opens new markets for UK exporters and lifts net trade over the long term
    • a rise in unit labour costs that reduces competitiveness, so exporters lose overseas orders and imports become cheaper for UK buyers
    • a sharp rise in the sterling exchange rate, which makes UK goods cheaper for overseas buyers and so boosts exports in every market

17. Which description best reflects the J-curve effect following a depreciation?

    • The trade balance worsens permanently because all imports become cheaper, so spending shifts abroad and never returns home
    • The trade balance is unaffected because only the financial account changes, and currency moves do not affect the prices of traded goods
    • The trade balance may worsen at first because prices change faster than volumes, then improve as volumes adjust
    • The trade balance improves at once and then falls back permanently, because cheaper exports are quickly reversed by dearer imports

18. The degree of protectionism is best described as:

    • the share of national income that households save and hold as domestic financial assets rather than spend on imported goods
    • the amount of money that a government spends on imports each year, recorded in the public accounts as a separate category
    • the extent to which firms limit domestic price competition through agreements with rivals, keeping prices high for home buyers
    • the extent to which governments use tariffs, quotas and other barriers to restrict international trade

19. Which statement best evaluates the view that a UK net trade deficit always reduces national welfare?

    • A deficit is always beneficial because imports lower the price of exports, so domestic firms gain from cheaper foreign inputs
    • A deficit always reduces welfare because imports never raise living standards, since spending abroad does nothing for domestic workers
    • A deficit may reflect strong domestic demand and cheap imports, so its welfare effect depends on how the borrowing is used
    • A deficit has no link to welfare since it is only a financial account matter, so trade balances never affect households or firms

20. If exports fall by 20 billion and imports fall by 25 billion, with everything else unchanged, what happens to net trade?

    • net trade falls by 45 billion
    • net trade rises by 5 billion
    • net trade falls by 5 billion
    • net trade rises by 45 billion

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