Page 141 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 11 : Balance of Payments and Balance of Trade : Meaning and Components

Self- Assessment Notes
1. Choose the correct option:
(i) A nation's balance of trade is equal to its exports less its imports of
(a) goods (b) goods and services
(c) financial assets (d) official reserves
(ii) A nation's balance on the current account is equal to its exports less its imports of
(a) goods and services
(b) goods and services, plus Canadian purchases of assets abroad
(c) goods and services, plus net investment income and net transfers
(d) goods and services, minus foreign purchases of assets in Canada
(iii) The net investment income of Canada in its international balance of payment is the
(a) interest income it receives from foreign residents
(b) dividends it receives from foreign residents
(c) excess of interest and dividends it receives from foreign residents over what it paid to
them
(d) excess of public and private transfer payments it receives from foreign residents over
what it paid to them
(iv) A nation may be able to correct or eliminate a persistent (long-term) balance of payments
deficit by
(a) lowering the barriers on imported goods
(b) reducing the international value of its currency
(c) expanding its national income
(d) reducing its official reserves
(v) If exchange rates float freely, the exchange rate for any currency is determined by the
(a) demand for it
(b) supply of it
(c) demand for and the supply of it
(d) official reserves that back it
(vi) If a nation had a balance of payments surplus and exchange rates floated freely, the foreign
exchange rate for its currency would
(a) rise, its exports would increase, and its imports would decrease
(b) rise, its exports would decrease, and its imports would increase
(c) fall, its exports would increase, and its imports would decrease
(d) fall, its exports would decrease, and its imports would increase
11.5 Summary

• The BOP is one of the oldest and the most important statistical statement for any country,
especially the more open economies. Put in a nutshell the BOP of any country is “a systematic
record of all economic transactions between the residents of a given country and of the residents
of the rest of the world in an accounting period (viz. a year).” The system of BOP accounting,
some of the concepts and terminologies used in the BOP expression and the interpretation of
the BOP categories are of utmost importance to any student of international economics.
• The BOP transactions include all the foreign receipts of and payments by a country during a
given year. The receipts include all the earnings and borrowings of foreign exchange, and they
are recorded as credit items. The payments include all the spending and lendings of foreign

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