The balance of payments (BOP) measures the financial transactions made between Consumers, Businesses and the government in one country with others. Here on MCQs.club we have prepared Multiple Choice Questions (MCQs) on Balance of trade and balance of payment, these MCQs fully cover balance of trade meaning, the difference between balance of trade and balance of payment, definition of balance of trade with its components, types along with examples. These MCQs include balance of trade current account MCQs, negative and favorable balance of payments. Our prepared MCQs are helpful for Business management exams, competitive exams and Professional accountancy exams.

The balance of payments (BOP) measures the financial transactions made between

1. Consumers
2. Businesses
3. The government in one country with others.
4. All of the above

The balance of payments (BOP) made up by:

1. The current account
2. The capital accounts
3. Official financing account
4. A combination of above

The current account includes:

1. Trade in goods
2. Trade in services
3. Investment income
4. Transfers – such as overseas aid
5. All of the above

The capital and financing account – These accounts record the flow of capital and finances between the domestic country and the rest of the world.

1. True
2. False

The types of flow of capital and finances include:

1. Real foreign direct investment
2. Portfolio investment
3. Financial derivatives
4. Reserve assets
5. All of the above

If there is a deficit in current and capital account, it is balanced by:

1. Selling gold, or other financial reserves
2. Borrowing from other Central Banks
3. Both A&B
4. None

If there is a surplus in current and capital account, it is balanced by:

1. Buying gold, or other financial reserves
2. Paying off debts
3. Both A&B
4. None

Balance of trade –

1. is concerned with the trade of visible goods (i.e. material goods)
2. is more thorough as it includes not just visible goods, but also invisible.
3. Both A&B
4. None

Balance of payments –

1. is concerned with the trade of visible goods (i.e. material goods)
2. is more thorough as it includes not just visible goods, but also invisible.
3. Both A&B
4. None

Visible goods –

1. These can be recorded through customs duties and their value can be measured. Visible goods will include anything tangible, including cars, wine and shoes.
2. These goods are often intangible, and include things like financial services, insurance and capital flows.
3. They are harder to comprehend, but still represent the flow of money in and out of an economy.
4. All of the above

Invisible goods –

1. These can be recorded through customs duties and their value can be measured. Visible goods will include anything tangible, including cars, wine and shoes.
2. These goods are often intangible, and include things like financial services, insurance and capital flows.
3. They are harder to comprehend, but still represent the flow of money in and out of an economy.
4. Option B&C only

What is Balance of payments (BOP)?

1. It indicates whether a country has enough savings, or other service transactions, to pay for the complete consumption of their imports.
2. It is an indicator of whether a country can produce enough output, to sustain its growth.
3. Both A&B
4. None

If a country has a balance of payments deficit, this is probably owing to them importing more goods and services than it exports. It will therefore need to borrow from another country to pay for the imports.

1. True
2. False

Terms of trade –

1. The ratio of export prices to import prices. It is the amount of import goods an economy can purchase per unit of export goods.
2. The terms of trade are said to improve when export prices rise faster than import prices and to worsen when import prices rise faster than export prices.
3. Improving terms of trade do not necessarily result in an increase in balance of payment surplus.
4. All of the above

What is a current account deficit?

1. Running a deficit means that there is a net outflow of demand versus the income that comes into a country.
2. This can be thought of as a country “not paying their way”.
3. The current account isn’t required to balance, because the capital account can run a surplus.
4. All of the above

Causes of a current account deficit include:

1. High income elasticity of demand for imports
2. Long term decline in manufacturing potential
3. Changes in commodity prices
4. All of the above

Corrective measures to current account deficit may be:

1. Monetary
2. Non-monetary
3. Both A&B
4. None

Monetary measures corrective measures to current account deficit include:

1. Exchange rate depreciation
2. Deflation
3. Exchange control
4. All of the above

Non-Monetary measures corrective measures to current account deficit include:

1. Tariffs: These are duties placed upon imports.
2. Quotas: A government may fix a permanent amount of a good that may be imported into a country.
3. Export promotion
4. Import substitution
5. All of the above

Exchange rate –

1. The exchange rate is the price of one currency expressed in terms of another currency.
2. An exchange rate can be viewed as a comparison of the relative prices in two countries
3. It will affect the price of exports and imports.
4. All of the above

High exchange rates –

1. It is also described as a strong exchange rate
2. A high exchange rate means that a currency is worth more of the foreign currency compared to a time when it is worth less of the same foreign currency.
3. The opposite of ‘high exchange rate’ is a weak or low exchange rate.
4. All of the above

When the exchange rate falls:

1. Demand for imports will contract
2. Demand for exports will extend
3. Both A&B
4. None

When the exchange rate rises:

1. Demand for exports contracts
2. Demand for imports extends
3. Both A&B
4. None

The government may wish to influence exchange rates for a number of reasons including:

1. To stabilise the currency against the pressures of short-term speculation.
2. To provide greater stability in order to encourage domestic firms to export more.
3. To stimulate demand for exports or to reduce imports.
4. All of the above

Which of the following is correct for “Fixed exchange rate”?

1. The rate is set at a fixed parity against one or more foreign currencies and the government agrees to buy or sell at this rate to stop fluctuations.
2. The rate is set by the unhindered forces of demand and supply for the currency on the foreign exchange markets.
3. Both A&B
4. None

Which of the following is correct for “Floating exchange rate”?

1. The rate is set at a fixed parity against one or more foreign currencies and the government agrees to buy or sell at this rate to stop fluctuations.
2. The rate is set by the unhindered forces of demand and supply for the currency on the foreign exchange markets.
3. Both A&B
4. None

Advantages of fixed exchange rates include:

1. Avoids damaging speculation against the currency.
2. Promotes free-trade as importers and exporters are released from exchange rate risk.
3. Forces governments to follow responsible economic policies at home because excess aggregate demand and inflation would make it very difficult to support the currency in the long term.
4. All of the above

Advantages of floating exchange rates include:

1. Avoids the need for government intervention in the foreign exchange markets and the costly use of foreign exchange reserves.
2. May act automatically to correct balance of payments disequilibrium.
3. Frees the policy instruments of government to concentrate on internal issues such as unemployment and inflation.
4. All of the above

Which of the following is correct for Devaluation?

1. Devaluation describes a policy of deliberately weakening the domestic currency against others.
2. The objective devaluation is to reduce balance of payments deficits.
3. Both A&B
4. None

The effectiveness of the devaluation policy depends on:

1. The price elasticity of demand for imports.
2. The price elasticity of demand for exports.
3. Both A&B
4. None

Demand for imports may be price inelastic due to:

1. firmly entrenched preferences for overseas goods
2. lack of flexibility of domestic firms to replace imports
3. dependence on imported raw materials and food.
4. All of the above

Demand for exports rendered inelastic by:

1. poor perceived quality of exports
2. lack of flexibility of domestic firms to take advantage of export demand.
3. Both A&B
4. None

Which of the following is correct for J-curve?

1. The J-curve is an interesting continuation of one of the main combative strategies to a current account deficit: exchange rate depreciation.
2. The J-curve shows how in the short run, the deficit may get worse before improving.
3. Both A&B
4. None

—More to come soon—

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Balance of Trade and Balance of Payment MCQs

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