SUMMARING OF UNIT 5

 Trade refers to the process of buying, selling or exchanging of goods, and services. There are two
broad categories of trade: domestic trade and international trade.
 Domestic trade refers to the exchange of goods or services within an individual country or territory.
 Domestic trade has several benefits over international trade.
 International trade refers to the exchange of goods and services among different countries of the
world.
 All payments and receipts of foreign exchange arising from such transactions are listed in the balance
of payments accounts.
 Balance of payments accounts are prepared using the double-entry system of accounting, in which the
sum of all debits equals the sum of all credits, and the accounts are always in balance.
 If a transaction earns foreign currency for the country, it is called a credit and is recorded using a plus
sign
 Current account has three parts trade balance, net services, and net transfers.
 The capital account of BOP, Private Transactions, Official Transactions, Direct Investment: Portfolio
Investment
 The balance of trade (or trade balance) is any gap between a nation’s dollar value of its exports, or
what its producers sell abroad, and a nation’s dollar worth of imports, or the foreign-made products
and services that households and businesses purchase.
 Recall from the Macroeconomic Perspective that if exports exceed imports, the economy is said to
have a trade surplus. If imports exceed exports, the economy is said to have a trade deficit. If exports
and imports are equal, then trade is balanced.
2006 E.C for Grade 11
1. Balance of payment deficit can arise if the
A. Deficit in the current account is less than surplus in the capital account
B. Deficit in the current account is more than surplus in the capital account
C. Surplus in the capital account is more than the deficit in the current account
D. surplus in the capital account is equal to the deficit in the current account
2. Which one of the form of trade barrier is more transparent?
A. Tariff B. Quota C. Oral restriction D. Written restriction
2007 E.C for Grade 11
3. Which of the following is component of the current account section of the balance of payment?
A. Trade balance C. Direct investment
B. Official transaction D. Private transaction
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 4. Which of the following affects the balance of payments of a country directly?
A. Changes in import and export.
B. Changes in internal trade and production.
C. Changes in consumption and investment.
D. Changes in tax revenues and capital expenditure
5. Which of the following is a true statement?
A. When exports are less than imports, the country has trade surplus and GDP rises
B. When exports are more than imports, the country has trade deficit and GDP rises
C. When exports are more than imports, the country has trade surplus and GDP rises
D. When imports are more than exports, the country has trade surplus and GDP rises
E. When imports are more than exports, the country has trade deficit and GDP rises
6. A country facing trade deficit, where imports are much greater than exports, which of the following
tends to reduce the deficit?
A. Fixing the exchange rate. C. Revaluation of domestic currency.
B. Floating the exchange rate. D. Devaluation of domestic currency.
7. Trade between two or more than two countries is termed a
A. International Trade C. External Trade
B. Unilateral Trade D. International trade
8. If Ethiopia produces both wheat and textile at a higher cost than United States of America does, which
of the following is the likely pattern of trade between the two countries?
A. No trade id possible between the two countries in these goods
B. Ethiopia exports textile and imports wheat if the relative cost of production of textile to wheat is
less than the relative cost in United States of America
C. Ethiopia exports wheat and imports textile if the relative cost of production of textile to wheat is
less than the relative cost in United States of America
D. Ethiopia imports both textile and wheat even if the relative cost of production of textile to wheat
is less than the relative cost in United States of America
2008 E.C for Grade 11
9. Which one of the following holds if the difference between the values of exports is greater than that of
imports of goods and services?
A. The current account component of the balance of payments will improve
B. The capital account component of the balance of payment will improve
C. The current account component of the balance of payment will deteriorate
D. The capital account component of the balance of payments will deteriorate
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 10. Which one of the following is true about trade restrictions?
A. Tariffs are restrictions mainly applied in domestic trade
B. Quotas are not restrictions applied on international trade
C. Quotas and tariffs are widely applied restrictions on international trade
D. Quotas and tariffs enhance international trade but restrict domestic trade
11. Trade would be the “engine of growth” best in economies with
A. Positive or balanced trade. C. all types of trade balance
B. Trade deficit. D. exclusively negative balance of trade.
12. Which one of the following is a solution for a country with fixed exchange rate that suffers persistent
deficit in its balance of payments?
A. The country should keep its fixed exchange rate as it is
B. The country’s currency should appreciate against other currencies
C. The country should devalue its currency against other currencies
D. The country should revalue its currency against other currencies.
OTHER
13. International trade contributes to
A. Population B. Inflation C. Economy D. Trade Barrier
14. Absolute cost advantage is propounded by
A. J.S Mill B. Adam Smith C. David Ricardo D. Samuelson
15. What implies that the international specialization is NOT reversible and is an integral part of
development?
A. Balance of payment B. Tariff C. Vent for surplus D. Import tax
16. According to Ricardo, what determines trade between two countries?
A. Comparative difference B. Absolute difference C. Gains from trade D. PPC
17. Government policies about export and import is called
A. Commercial policy B. Fiscal policy C. Monetary policy D. Finance policy
18. When tariff are imposed
A. The prices of imports would increase to the extent of tariff
B. The prices of imports would decrease to the extent of tariff
C. The prices of imports would increase by a multiple of tariff
D. The prices of imports would decrease by a multiple of tariff
19. The Absolute advantage theory indicates that a country should engage in the production and the
exchange of those commodities where it has
A. A comparative advantage C. An absolute advantage
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 B. Relative factor endowment D. Greater opportunity cost
20. A country's Balance of Trade in unfavourable when
A. Exports exceed imports C. Iimports exceed exports
B. Terms of trade become unfavourable D. Imports grow in proportion to exports
21. Theoretically, trade between two countries takes place on account of
A. Difference in costs C. Scarcity of goods
B. Comparative difference in costs D. Need for exports
22. A favourable Balance of Trade position of a country implies
A. Imports are greater than exports C. Exports are greater than imports
B. Both imports and exports are equal D. Rising imports and falling export
23. Goods are exchanged with in the country then it is called
A. Internal trade B. Modern theory of trade C. New trade theory D. International trade
24. Zero sum game theory applies to
A. Mercantilism C. Absolute cost advantage theory
B. Factor equalization theorem D. New trade theory
25. A deficit in Balance of payment can be corrected by
A. An increase in interest rate C. A decrease in interest rate
B. Discouraging capital inflows D. Restricting remittances
26. As the rate of exchange falls then
A. Export will fall &Import will rise C. Export will rise &Import will rise
B. Export will rise &Import will fall D. Export will fall &Import will fall
27. According to Leontief capital Rich country will
A. Export capital intensive and import labour intensive C. Export both goods
B. Export labour intensive and import capital intensive D. Import both goods
28. According to comparative advantage theory international trade will NOT take place if
A. One country is efficient in production of both goods
B. One country is inefficient in production of both goods
C. Opportunity cost of two products at different in both countries
D. Opportunity cost of two products are same in both countries
29. According to Smith "Vent for surplus" approach is applicable in
A. Developed countries C. Underdeveloped countries
B. Developing countries D. All of the above
30. International trade and domestic trade Differ because of
A. Different government policies C. Immobility of factors
B. Trade restriction D. All of the above

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