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Fundamentals of Multinational Finance, 6e (Moffett et al.)
Chapter 3 The Balance of Payments
3.1 Fundamentals of BOP Accounting
1) Which of the following is NOT a major subaccount of the Balance of Payments?
A) the financial account
B) the accounts payable
C) the capital account
D) the current account
2) Which of the following international transactions would NOT be counted as a balance of
payments (BOP) transaction?
A) An American tourist purchases cheese in Milwaukee, Wisconsin.
B) The U.S. subsidiary of a British firm pays profits (dividends) back to its parent firm in
London.
C) A Canadian lumber baron purchases a U.S. corporate bond through an investment broker in
Seattle.
D) All of the above are considered BOP transactions.
3) The balance of payments as applied to a course in international finance may be defined as:
A) the amount still owed by an exporting firm after making an initial down payment.
B) the amount still owed by governments to the International Monetary Fund.
C) the measurement of all international economic transactions between the residents of a country
and foreign residents.
D) the amount of a country’s merchandise trade deficit or surplus.
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4) Balance of payment (BOP) data may be important for any of the following reasons:
A) BOP data helps to forecast a country’s market potential, especially in the short run.
B) the BOP is an important indicator of a country’s foreign exchange rate.
C) changes in a country’s BOP may signal a change in controls over payment of dividends and
interest.
D) all of the choices provided above
5) A country experiencing a serious BOT ________ is more likely to ________ exports than
otherwise.
A) surplus; contract
B) surplus; expand
C) deficit; expand
D) none of the above
6) Which of the following would NOT be considered a typical BOP transaction?
A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent
company.
B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in
Zurich.
C) A U.S. tourist purchases gifts at a museum in London.
D) All are example of BOP transactions.
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7) Which of the following is NOT an item to be considered in BOP calculations?
A) A foreign resident purchases a U.S. Treasury Bill.
B) A U.S.-based firm manages the development of an oil field in Kazakhstan.
C) A consumer buys a VCR made in Korea from a Florida Wal-Mart store.
D) A U.S. citizen living in Minnesota travels to Winnipeg, Canada, and buys a case of LaBatt’s
Canadian beer.
8) The balance of payments:
A) determines the eligibility of countries for IMF aid.
B) adds up the value of all assets and liabilities of a country on a specific date.
C) records all international transactions for a country over a period of time.
D) all of the above
9) An American tourist purchases a leather jacket while in Italy. Which of the following
statements is true?
A) The leather purchase would be considered an import for the U.S. BOP.
B) This transaction would be properly accounted for in the Current Account of the U.S. BOP.
C) The leather purchase is considered an import of a good, and thus, considered part of the
balance of trade as well.
10) Which of the following statements about the balance of payments is NOT true?
A) The BOP is the summary statement of all international transactions between one country and
all other countries.
B) The BOP is a flow statement, summarizing all international transactions that occur across the
geographic borders over a period of time, typically a year.
C) Although the BOP must always balance in theory, in practice there are substantial imbalances
as a result of statistical errors and misreporting of current account and financial account flows.
D) All of the above are true.
11) When the world went to a system of floating exchange rates, the Balance of Payments
became a relic of a system of fixed exchange rates and is no longer watched by serious economic
12) The BOP should always balance.
13) Changes in the BOP may predict the imposition or removal of foreign exchange controls.
14) A country experiencing a serious trade deficit is not as likely to expand imports as it would
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15) The authors identify a tip for understanding BOP accounting. They recommend that you
“follow the cash flow.”
16) The BOP must be in balance, but the current account need not be.
17) Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored
18) Like a balance sheet, the Balance of Payments adds up the value of all assets and liabilities
of a country on a specific date.
19) Because current and financial/capital account balances use double-entry bookkeeping it is
unusual to find serious discrepancies in the debits and credits.
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20) The measurement of all international economic transactions that take place between the
residents of a country and foreign residents is called the balance of payments (BOP). List and
explain three reasons why host-country BOP data is important to managers and investors.
3.2 The Accounts of the Balance of Payments
1) Which of the following is NOT a part of the Current Account of BOP?
A) net export/import of goods
B) balance of trade
C) net portfolio investment
D) net export/import of services
2) Which of the following is NOT part of the Financial Account of the BOP?
A) net foreign direct investment
B) net import/export of services
C) net portfolio investment
D) other Financial items
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3) Which of the following is NOT part of the balance of payments account?
A) the current account
B) the financial/capital account
C) the official reserves account
D) All of the above are BOP accounts.
4) The ________ includes all international economic transactions with income or payment flows
occurring within the year.
A) capital account
B) current account
C) financial account
D) IMF account
5) If your company were to import and export textiles, the transactions would be recorded in the
current account subcategory of:
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
6) The travel services provided to international travelers by United Airlines would be recorded in
the current account subcategory of:
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
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7) Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The
proportion of net income paid back to the parent company as a dividend would be recorded in the
current account subcategory of:
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
8) The subcategory that typically dominates the current account is:
A) goods (merchandise) trade.
B) services trade.
C) income trade.
D) transfer accounts.
9) In 2010 the United States posted a current account deficit of -$471 billion. The bulk of the
negative value came from:
A) a net transfer deficit.
B) an income balance deficit.
C) a goods trade deficit.
D) an income trade deficit.
10) Over the last two decades the surplus on U.S. services trade has typically been ________ the
deficit on U.S. goods trade.
A) greater than
B) equal to
C) less than
D) The relationship is constantly shifting from greater than to less than.
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11) The ________ of the balance of payments measures all international economic transactions
of financial assets.
A) current account
B) merchandise trade account
C) services account
D) capital and financial accounts
12) The financial account consists COMPLETELY of which four components?
A) stock investment, bond investment, derivative investment, and mutual fund investment
B) direct investment, stock investment, net financial derivatives, and bond investment
C) direct investment, portfolio investment, net financial derivatives, and other asset investment
D) mutual fund investment, portfolio investment, derivative investment, and stock investment
13) When categorizing investments for the financial account component of the balance of
payments the ________ is an investment where the investor has no control whereas the
________ is an investment where the investor has control over the asset.
A) direct investment; portfolio investment
B) direct investment; indirect investment
C) portfolio investment; indirect investment
D) portfolio investment; direct investment
14) In general there is consensus that ________ should be free, but there is no such consensus
that ________ should be free.
A) international investment; international goods trade
B) international investment; international trade
C) international trade; international goods trade
D) international trade; international investment
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15) The two major concerns about foreign direct investment are:
A) national defense and taxes.
B) who controls the assets and who receives the profits.
C) who receives the profits and taxes.
16) Portfolio investment is capital invested in activities that are ________ rather than made for
________.
A) short term; the long term
B) long term; profit
C) profit motivated; control
D) control motivated; profit
17) Consider the following: A foreign automobile company builds a manufacturing plant in
Tennessee and European investors buy U.S. Treasury Bonds.
A) Both activities would be considered direct investment.
B) Both activities would be considered portfolio investment.
C) The auto manufacturer in engaging in portfolio investment, and the European investors are
engaged in direct investing.
D) The auto manufacturer in engaging in direct investment, and the European investors are
engaged in portfolio investing.
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18) China is currently experiencing a surplus in its current account and its capital/financial
accounts. Which of the following is NOT a contributing factor for this unusual situation?
A) The exceptional growth in the Chinese economy contributes to the current account surplus.
B) The positive prospects for China’s continued growth contribute to the capital/financial
account surplus.
C) China’s inevitable acquisition of Taiwan is driving the market for Chinese investment.
D) All of the above are contributing factors for China’s twins surpluses.
19) If China wished to reduce their accumulation of foreign exchange reserves they could:
A) allow their currency, the yuan, to float freely in the market place.
B) reduce their current account surplus by importing more goods than they export.
C) undertake both of the activities identified in choices A and B.
D) dig a big hole and bury the reserves.
20) The largest single component of the United States current account is:
A) current transfers.
B) income payments and receipts.
C) goods (merchandise) imports and exports.
D) services imports and exports.
21) In general, as a country’s income increases, so does the demand for imports.
22) For at least the last decade, the United States has consistently run a surplus in services trade
23) Expenditures by U.S. students abroad and foreign students pursuing studies in the United
24) International debt security purchases and sales are defined as portfolio investments for
financial account purposes because by definition debt securities do not provide the buyer with
ownership or control.
25) Significant amounts of United States Treasury issues are purchased by foreign investors,
therefore the U.S. must earn foreign currency to repay this debt.
26) In the United States and most developed countries, the current account and the combined
financial/capital accounts tend to be inversely related in that when one is positive, the other tends