International Economics, 8e (Krugman)

Chapter 12

National Income Accounting and the Balance of Payments

12.1

The National Income Accounts

1)
A country's gross national product (GNP) is
A)

the value of all final goods and services produced by its factors of production and sold on the market in a given time
period.
B)
the value of all intermediate goods and services produced by its factors of production and sold on the market in a given
time period.
C)

the value of all final goods produced by its factors of production and sold on the market in a given time period.
D)

the value of all final goods and services produced by its factors of production and sold on the market.
E)
the value of all final goods and services produced by its factors of production, excluding land, and sold on the market in a
given time period.
Answer:

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2)
For most macroeconomists,
A)

national income accounts and national output accounts are equal to each other.
B)
national income accounts exceed national output accounts.
C)

national output accounts exceed national income accounts.

D)

it is impossible to tell whether national income accounts equal to national output accounts.
E)
None of the above.
Answer:

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3)
For most macroeconomists,
A)

gross national income and gross national product are the same.
B)
gross national income exceeds gross national product.
C)

gross national product exceeds gross national product.

D)

it is hard to tell whether gross national income equal gross national product.
E)
None of the above.
Answer:

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4)
The highest component of GNP is,
A)

the current account.

B)
investment.

C)

government purchases.
D)

consumption.
E)
None of the above.
Answer:

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5)
An example of how GNP accounts for services provided by foreign-owned capital (and GDP does not) is
A)

earnings of Spanish factory with British owners counts only in Spain's GDP.
B)
earnings of Spanish factory with British owners counts only in Britain's GNP.
C)

earnings of Spanish factory counts in Spain's GNP but are part of Britain's GDP.
D)

earnings of Spanish factory counts in Spain's GDP but are part of Britain's GNP.
E)
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None of the above.

Answer:

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6)
The sale of

A)

a used textbook does enter GNP.

B)
a used textbook does not enter GNP, but the sale of a used house does.
C)

both a used textbook and a used house do not enter GNP.

D)

a used house does not enter GNP, but the sale of a used book does.
E)
None of the above.
Answer:

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7)
Which one of the following statements is the most accurate?
A)

The sale of a used textbook does generate income for factors of production.
B)
The sale of a used textbook does not generate income for any factor of production.
C)
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The sale of a used textbook sometimes does and sometimes does not generate income for factors of production.
D)

It is hard to tell whether a sale of a used textbook does or does not generate income for factors of production.
E)
None of the above.
Answer:

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8)
Which one of the following statements is the most accurate?
A)

GNP plus depreciation is called net national product (NNP).

B)
GNP less depreciation is called net national product (NNP).
C)

GNP less depreciation is called net factor product (NFP).

D)

Answers A and C are both correct.

E)
None of the above.
Answer:

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9)
National income equals GNP
A)
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less depreciation, less net unilateral transfers, less indirect business taxes.
B)
less depreciation, plus net unilateral transfers, plus indirect business taxes.
C)

less depreciation, less net unilateral transfers, plus indirect business taxes.
D)

plus depreciation, plus net unilateral transfers, less indirect business taxes.
E)
less depreciation, plus net unilateral transfers, less indirect business taxes.
Answer:

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10)
The United States began to report its gross domestic product (GDP) only since
A)

1900.

1921.

1931.

1941.

1991.

B)

C)

D)

E)

Answer:

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11)
GDP is supposed to measure
A)

the volume of production within a country's borders.

B)
the volume of services generated within a country's borders.
C)

the volume of production of a country's output.

D)

GNP plus depreciation.

E)
None of the above.
Answer:

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12)
GNP equals GDP
A)

minus net receipts of factor income from the rest of the world.
B)
plus receipts of factor income from the rest of the world.
C)

minus receipts of factor income from the rest of the world.

D)

plus net receipts of factor income from the rest of the world.
E)
None of the above.
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Answer:

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13)
Movements in GDP
A)

and GNP usually do not differ greatly.

B)
and GNP usually do not differ greatly, as a practical matter.
C)

and GNP usually do differ greatly.

D)

are usually smaller than those of GNP movements, in practice.

E)
None of the above.
Answer:

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14)
In 2006, the United States had
A)

a surplus in the current account.

B)
a balance in the current account.
C)

a deficit in the current account.

D)

From 2006 data, it is too difficult to determine whether a surplus or a deficit existed in the current account.
E)
None of the above.
Answer:

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15)
Net unilateral transfers
A)

are part of a national income.

B)
are part of a country's product.
C)

must be added to NNP in calculations of national income.

D)

are part of a country's GNP.

E)
Only A and C.
Answer:

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16)
GDP is different than GNP in that
A)

it accounts for net unilateral transfers.

B)
it does not account for indirect business taxes.
C)

it does not account for a country's production using services with foreign-owned capital.
D)

it accounts for depreciation.

E)
None of the above.
Answer:

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17)
What are the main aspects of economic life that macroeconomics analysis is most concerned with?
Answer:

There are four main aspects: unemployment, saving, trade imbalances, and money and the price level.
Question Status:

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18)
What can you learn from the figure below (Figure 12-1 from the text) which depicts the U.S. GNP and its components for
the year 2006?

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Answer:

The highest component of GNP is consumption and the U.S. has a negative current balance.
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12.2

National Income Accounting for an Open Economy

1)
Movements in GDP
A)

differ greatly from movements in GNP.

B)
do not differ greatly from movements in GNP.
C)

are not allowed to differ at all from movements in GNP by definition.

D)

need to be inflation adjusted in order to match movements in GNP.

E)

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None of the above.

Answer:

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2)
Purchases of inventories by
A)

firms are not counted in investment spending.

B)
firms are also counted in investment spending.
C)

households are also counted in investment spending.

D)

households and Firms are also counted in investment spending.

E)
None of the above.
Answer:

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3)
In open economies,
A)

saving and investment are necessarily equal.

B)
as in a closed economy, saving and investment are not necessarily equal.
C)

saving and investment are not necessarily equal as they are in a closed economy.
D)

saving and investment are necessarily equal contrary to the case of a closed economy.
E)
None of the above.
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Question Status:

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4)
Investment is usually
A)

more variable than consumption.

B)
less variable than consumption.
C)

as variable as consumption.
D)

It is hard to tell from the data whether investment is more or less variable than consumption.
E)
None of the above.
Answer:

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5)
Government purchases are defined as
A)

only goods purchased by federal, state, or local governments.

B)
all goods and services purchased by the federal government.
C)

all goods and services purchased by the federal or state government.

D)
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all goods and services purchased by the federal, state, or local government.
E)
None of the above.
Answer:

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6)
Government transfer payments like social security and unemployment benefits are
A)

included in government purchases.

B)
not included in government purchases.
C)

not included in government purchases, but they are included in the consumption component of GNP.
D)

not included in government purchases, but they are part of the investment component of GNP.
E)
None of the above.
Answer:

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7)
In 1929, government purchases accounted for
A)

only 18.5 percent of U.S. GNP.

B)
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only 8.5 percent of U.S. GNP.

C)

28.5 percent of U.S. GNP.

D)

38.5 percent of U.S. GNP.

E)
48.5 percent of U.S. GNP.
Answer:

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8)
Which one of the following expressions is the most accurate?
A)

CA = EX - IM
B)
CA = IM - EX
C)

CA = EX = IM
D)

CA = EX + IM
E)
None of the above.
Answer:

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9)
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A country's current account

A)

balance equals the change in its net foreign wealth.

B)
balance equals the change in its foreign wealth.
C)

surplus equals the change in its foreign wealth.

D)

deficit equals the change in its foreign wealth.

E)
None of the above.
Answer:

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10)
The CA is equal to
A)

Y - (C - I + G).
B)
Y + (C + I + G).
C)

Y - (C + I + G).
D)

Y - (C + I - G).
E)
None of the above.
Answer:

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Question Status:

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11)
Which of the following is true?
A)

A country with a current account surplus is earning more from its exports than it spends on imports.
B)
A country could finance a current account deficit by using previously accumulated foreign wealth to pay for its imports.
C)

A country with a current account deficit must be increasing its net foreign debts by the amount of the deficit.
D)

We can describe the current account surplus as the difference between income and absorption.
E)
All of the above are true.
Answer:

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12)
Over the 1980s,
A)

there is no question that a large increase in U.S. foreign assets did occur.
B)
there is a question whether a large decrease in U.S. foreign assets did occur.
C)

there is no question that a large decrease in U.S. foreign assets did occur.
D)
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there is no question that there was almost no change in U.S. foreign assets.
E)
None of the above.
Answer:

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13)
In a closed economy, national saving
A)

sometimes equals investment.

B)
always equals investment.
C)

is always less than investment.

D)

is always more than investment.

E)
None of the above.
Answer:

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14)
For open economies,
A)

S = I.

S = I + CA.

S = I - CA.

S > I + CA.

B)

C)

D)

E)

S < I + CA.
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Question Status:

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15)
An open economy
A)

can save only by building up its capital stock.

B)
can save only by acquiring foreign wealth.
C)

cannot save either by building up its capital stock or by acquiring foreign wealth.
D)

can save either by building up its capital stock or by acquiring foreign wealth.
E)
None of the above.
Answer:

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16)
A closed economy
A)

can save either by building up its capital stock or by acquiring foreign wealth.
B)
can save only by building up its capital stock.
C)

can save only by acquiring foreign wealth.

D)
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cannot save either by building up its capital stock or by acquiring foreign wealth.
E)
None of the above.
Answer:

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17)
Disposable income is National income
A)

less taxes collected from households and firms by the government.

B)
plus net taxes collected from households and firms by the government.
C)

less net taxes collected from households and firms by the government.
D)

less net taxes collected from households by the government.

E)
less net taxes collected from households and firms by the government.
Answer:

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18)
g

Government savings, S , is equal to

A)

T - G.

B)
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T + G.

T = G.

T + G - I.

C)

D)

E)

None of the above.

Answer:

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19)
Which of the following is false about private savings and government savings?
A)

SP = Y - T - C
B)
Unlike private saving decisions, government saving decisions are often made with an eye toward their effect on output
and employment.
C)

Total savings (S) = SP + Sg.

D)

The national income identity can help us to analyze the channels through which government saving decisions influence
macroeconomic conditions.
E)
None of the above; all statements are true.
Answer:

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New

20)
p

In a closed economy, private saving, S , is equal to

A)

I - (G - T).

B)

I + (G - T).

I + (G + T).

I - (G + T).

C)

D)

E)

I + (G - T) + C.
Answer:

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21)
p

In an open economy, private saving, S , is equal to

A)

I - CA + (G - T).
B)
I + CA - (G - T).
C)

I + CA + (G - T).
D)

I - CA - (G - T).
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E)
I + CA + (G + T).
Answer:

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22)
Ricardian equivalence argues that when the government cuts taxes and raises its deficit,
A)

consumers anticipate that they will face lower taxes later to pay for the resulting government debt.
B)
consumers anticipate that they will higher services from the government.
C)

consumers anticipate that they will face higher taxes later to pay for the resulting government debt.
D)

consumers anticipate it will affect their future taxes, in general in the direction of lowering future taxes.
E)
None of the above.
Answer:

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23)
Ricardian equivalence argues that when the government
A)

increases taxes and raises its deficit, consumers anticipate that they will face higher taxes later to pay for the resulting
government debt, thus people will raise their own private saving to offset the fall in government saving.
B)
cuts taxes and decreases its deficit, consumers anticipate that they will face higher taxes later to pay for the resulting
government debt, thus people will raise their own private saving to offset the fall in government saving.
C)

cuts taxes and raises its surplus, consumers anticipate that they will face higher taxes later to pay for the resulting
government debt, thus people will raise their own private saving to offset the fall in government saving.
D)

cuts taxes and raises its deficit, consumers anticipate that they will face lower taxes later to pay for the resulting
government debt, thus people will raise their own private saving to offset the fall in government saving.
E)
cuts taxes and raises its deficit, consumers anticipate that they will face higher taxes later to pay for the resulting
government debt, thus people will raise their own private saving to offset the fall in government saving.
Answer:

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24)
In the United States over the past fifty years, the fraction of GNP devoted to consumption has fluctuated in a range of
about
A)

42 to 49 percent.
B)
32 to 39 percent.
C)

22 to 29 percent.
D)
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82 to 89 percent.
E)
62 to 70 percent.
Answer:

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25)
In the United States, (gross) investment has fluctuated between ________ of GNP in recent years.
A)

2 and 12 percent
B)
12 and 22 percent
C)

22 and 32 percent
D)

32 and 42 percent
E)
42 and 52 percent
Answer:

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26)
Government purchases currently take up about
A)

19 percent of U.S. GNP, and this share has not changed much since the late 1950s.
B)
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38 percent of U.S. GNP, and this share has not changed much since the late 1950s.
C)

18 percent of U.S. GNP, and this share has been increasing since the late 1950s.
D)

18 percent of U.S. GNP, and this share has been decreasing since the late 1950s.
E)
None of the above.
Answer:

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27)
The position of the United States current account balance in 2007 was
A)

lent over 6 percent of its GNP, resulting in a large current account surplus.
B)
borrowed over 6 percent of its GNP, leading to a large current account deficit.
C)

achieved a currant account balance of zero.

D)

borrowed over 10 percent of its GNP, leading to a large current account deficit.
E)
None of the above.
Answer:

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28)
Which one of the following statements is false?
A)

The United States had accumulated substantial foreign wealth by the early 1980s.
B)
The 1980s witnessed a sustained current account deficit of proportions unprecedented in the twentieth century opened
up.
C)

In 1987, the country became a net debtor to foreigners for the first time since World War I.
D)

U.S. foreign debt has continued to grow and now stands at 25 percent of GNP.
E)

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The U.S. foreign debt was paid off in the 1990s, allowing the U.S. to attain a current account surplus. However, the deficit
has returned in recent years.
Answer:

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29)
What is the national income identity for a closed economy?
Answer:

Y=C+I+G

Question Status:

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30)
What is the national income identity for an open economy?
Answer:

Y = C + I + G + EX - IM
Question Status:

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31)
Discuss the values of private saving in closed and open economies.
Answer:

In a closed economy, private saving, S , is equals to, I + (G - T). In a open economy, private saving, S , is equals to I + CA
+ (G - T). Open economy helps in extending the opportunities for private saving or dis-saving, or borrowing.
Question Status:

New

32)
Discuss the effects of government deficits on the current account.
Answer:
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A hard and difficult issue. During the Reagan administration, the creation of twin deficits, where by slashing taxes,
government deficits increased, which was accompanied with increased current account deficits.
Using the identity, CA = SP + Sg - I and Ricardian equivalence, which argues that an increase in the government deficit

(by definition lowers Sg) will cause a roughly equal increase in SP to offset an expected tax hike in the future. Thus, for I
constant, there is roughly no effect on the current account.
However, government budget deficit may change both private savings and investment, thus avoiding a creation of the
twin deficits. An example is the European countries reducing their budget deficits just prior to the introduction of the
euro in January 1999. Now, under the "twin deficits: theory, one would have expected the EU's current account surpluses
to increase. This has never happened. The main reason was sharp reduction in private saving rates.
A good answer should discuss Ricardian equivalence that argues that when the government cut taxes and raises its deficit,
consumers anticipate that they will face higher taxes later to pay for the resulting government debt. In anticipation, they
raise their own private saving to offset the fall in government saving. In addition, one should mention wealth effect in
anticipation of one Europe, assets prices increased, lowering private saving rates.
Question Status:

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33)
Explain how government deficits fell yet current account surpluses remained the same in the EU prior to adopting the
euro. Also explain this in the context of the "twin deficits" theory.
Answer:

Current accounts didn't change due to a sharp fall in the private saving rate, which declined by about 4 percent of output,
almost as much as the increase in government saving. The behavior of private savers neutralized the government's efforts
to raise national saving. The twin deficits theory, the idea of government deficit coupled with a sharply increased current
account deficit, expects the EU's current account surplus sharply as a result of the fiscal change, which didn't work in this
case.
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34)
Explain the concept of Ricardian equivalence.
Answer:

This an economic theory of taxes and government deficits. It argues that when the government cuts taxes and raises its
deficit, consumers anticipate higher taxes later to pay off the eventual government debt. Thus, they will raise their own
private saving to offset the fall in government saving. Governments that lower their deficits will induce the private sector
to lower its own saving. However, this doesn't hold in practice. Economists attribute only half of the decline in European
private saving to Ricardian effects.
Question Status:

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35)
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Assume
C = 40 + 0.8(Y - T)
G = 10
I = 20
T = 0, where T are taxes.
(a)
Calculate Y at equilibrium.
(b)
Calculate C, I, and G at equilibrium.
(c)
Now assume,
EX = 5 + 4EP/P
IM = 10 + 0.1 (Y - T) - 3EP/P
E=3
P = 1.5
P=2
Find equilibrium Y
Answer:

(a)
(b)

(c)

Y=C+I+G
Y = 350
C = 40 + 0.8 Y = 320
I = 20
G = 10
Y = 269.1667
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36)
Fill in the following table:

Answer:

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37)
What can one learn from the following figure?

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Answer:

The figure shows the U.S. current account and net foreign wealth from 1977 until 1996. It shows that a string of current
account deficits in the 1980s reduced America's net foreign wealth until, by the end 1996, the country had accumulated a
substantial net foreign debt. In 1987 the country became a net debtor to foreigners for the first time since World War I.
Question Status:

New

38)
Assume
C = 50 + 0.6 (Y - T)
G = 15
I = 15
T=2
(a)
Calculate Y at equilibrium
(b)
Calculate C
(c)
Assume
EX = 4 + 3EP/P
IM = 8 + 0.1 (Y - T) - 2EP/P
E=3
P = 1
P = 1.5
Find equilibrium Y
Answer:

(a)

(b)
(c)

Y=C+I+G
Y = 50 + 0.6(Y - 2 + 15 + 15)
Y = 197
C = 50 + 0.6 (197 - 2) = 117
Y = 170
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New

39)
Fill in the following table:

Answer:

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40)
Fill in the following table:

Answer:

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12.3

The Balance of Payments Accounts

1)
Every international transaction automatically enters the balance of payments
A)

once either as a credit or as a debit.

B)
twice, once as a credit and once as a debit.
C)

once as a credit.
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D)

twice, both times as debit.

E)
None of the above.
Answer:

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2)
The official settlements balance or balance of payments is the sum of
A)

the current account balance, the capital account balance, the non reserve portion of the financial account balance, the
statistical discrepancy.
B)
the current account balance and the capital account balance.
C)

the current account balance, the capital account balance, the non reserve portion of the financial account balance.
D)

the current account balance and the non reserve portion of the financial account balance.
E)
None of the above.
Answer:

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3)
An American buys a Japanese car, paying by writing a check on an account with a bank in New York. How would this be
accounted for in the balance of payments?
A)

current account, a Japanese good import

B)
current account, a U.S. good import
C)

financial account, a U.S. asset import

D)

financial account, a U.S. asset export

E)
Only B and D.
Answer:

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4)
The United States issues a $10,000 debt forgiveness to Argentina. How is this accounted for in the balance of payments?
A)

financial account, U.S. asset import

B)
current account, Argentina transfer payment
C)

current account, U.S. service export

D)

financial account, U.S. asset export

E)

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current account, Argentina good import

Answer:

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5)
A U.S. citizen buys a newly issued share of stock in England, paying for his order with a check, which the British company
deposits in its own U.S. bank account in New York. How is this transaction accounted for in the balance of payments?
A)

financial account, U.S. asset export

B)
current account, U.S. service import
C)

current account, British good export

D)

financial account, British asset import

E)
financial account, U.S. asset import
Answer:

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6)
You travel to Paris and pay for a $100 dinner with your credit card. How is this accounted for in the balance of payments?
A)

current account, French service import

B)
current account, U.S. good export
C)
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financial account, U.S. asset export

D)

financial account, U.S. asset import

E)
None of the above.
Answer:

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7)
The German government carries out an official foreign exchange intervention in which it uses dollars held in an American
bank to buy French currency from its citizens. How is this accounted for in the balance of payments?
A)

current account, French good export

B)
current account, German good import
C)

financial account, French asset export

D)

financial account, German asset export

E)
All of the above
Answer:

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8)
The earnings of a Spanish factory with British owners are
A)

counted in Spain's GDP.

B)
are part of Britain's GNP.
C)

are counted in Britain's GDP.

D)

are part of Spain's GNP.

E)
Only A and B.
Answer:

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9)
The services British capital provides in Spain are a service export from Britain,
A)

therefore they are subtracted from British GDP in calculating British GNP.
B)
therefore they are added to Spanish GDP in calculating Spanish GDP.
C)

therefore they are added to British GDP in calculating British GNP.

D)

Only A and B.
E)
None of the above.
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Question Status:

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10)
Unilateral transfers between countries are
A)

long-term loans.
B)
international gifts, or payments that do not correspond to the purchase of any good, service, or asset.
C)

part of the current account but not a part of national income.

D)

the difference between Y and GNP if the identity Y = C + I + G + CA holds exactly.

E)
Both B and D.
Answer:

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11)
Which of the following statements about the central bank is true?
A)

Only the central bank may hold foreign reserves and intervene officially in exchange markets.
B)
Central banks have little power to alter macroeconomic conditions.
C)

Today, central banks' reserves consist largely of gold.

D)
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The Federal Reserve holds only a small level of official reserve assets other than gold.
E)
Both B and C are true.
Answer:

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12)
How do we allocate statistical discrepancy among the current, capital, and financial accounts?
A)

We have no way of knowing exactly how to allocate this discrepancy.

B)
Depend on the degree of certainty by which we attribute to these accounts.
C)

Divide it evenly amongst the three accounts.

D)

Depend on the convention adopted by the specific financial institution.

E)
Statistical discrepancy signals human errors made when dealing with financial accounts.
Answer:

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13)
Which of the following is true about current cost method and market value method?
A)

They are used by the BEA to place current values on foreign indirect investments.
B)
These methods lead to the same valuations.
C)

Based on the current cost method, the BEA's 2006 estimate of U.S. net foreign wealth was $2,539.6 billion.
D)

Current cost method is preferred by the BEA.

E)
None of the above is true.
Answer:

Question Status:

New

14)
What types of international transactions are recorded in the balance of payment accounts?
Answer:

Three types: transactions that involve exports and imports of good and services; transactions that involve the purchase or
sell of financial assets; and exports and imports of good and services; other activities resulting in transfer of wealth
between countries which are recorded in the capital account.
Question Status:

New

15)
"The Balance of payments is always balanced." Discuss.
Answer:

True. Every international transaction automatically enters the balance of payments twice, once as a credit and once as a
debit.
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Current account + financial account + capital account = 0

Question Status:

New

16)
"The balance of payments accounts seldom balance in practice." Discuss.
Answer:

True. The main reasons are due to the fact that data collected or received from different sources may differ in coverage,
accuracy, and timing. In addition, data on services are not reliable as well as data from the financial account. Moreover,
accurate measurements of international interest and dividend receipts are particularly difficult.
Question Status:

New

17)
How does an economy's central bank manage the supply of money through official reserve transactions?
Answer:

Official foreign exchange interventions are a way for the central bank to inject money into the economy or withdraw it
from circulation. They can buy or sell international reserves in private asset markets in order to alter macroeconomic
conditions without noticeably impacting the money supply. When a central bank purchases or sells a foreign asset, the
transaction appears in its country's financial account as if a private citizen had carried out the same transaction.
Question Status:

New

18)
How can changes in the market price of wealth previously acquired alter a country's net foreign wealth?
Answer:

When Japan's stock market lost value in the 1990s, American and European owners of Japanese asset lost value in their
claims, while Japan's net foreign wealth increased. Similarly, exchange rate changes can have this effect. When the dollar
depreciates against foreign currency, foreigners who hold dollar assets will see their wealth fall when measured in their
home currencies.
Question Status:

New

19)
Discuss the two different methods the Bureau of Economic Analysis (BEA) uses to place current values on foreign direct
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investments.
Answer:

The current cost method values direct investments at the cost of buying them today. The market value method is meant to
measure the price at which the investments could be sold. These two methods can lead to different valuations because the
cost of replacing a particular direct investment and the price it would command if sold on the market may be hard to
measure.
Question Status:

New

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20)
Consider how the United States balance of payments accounts are affected when U.S. banks forgive two billion in debt
owed to them by the government of Argentina.
Answer:

In this case, the United States makes a two billion dollars capital transfer to Argentina, which should appear as a negative
two billions entry in the capital account. The associated credit is in the financial account, in the form of a two billion
dollars reduction in U.S. assets held abroad, i.e., a net asset "export," and therefore a positive balance of payments entry.
Question Status:

New

21)
What can one learn from Figure 12-3 from the text, shown below?

Answer:

This figure shows that since the 1980s, United States foreign assets and liabilities have both been increased rapidly.
However, liabilities have risen faster than assets, resulting in a substantial net foreign debt.
Question
Status:
New

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