10.1 Measuring Trade Balances

True or false?

Today, the United States and other countries measure the balance of trade by tracking only the goods and not the services traded between countries. 

False
 

Decades ago, economies measured the balance of trade by physical items traded. Today, goods make up less than half of most countries' total production, and services comprise more than half. Today, the current account encompasses four main components: merchandise trade, services, income payments, and unilateral transfers.
 

Which of the following statements is true?

Select the correct answer below:

If the trade deficit increases, the current account balance remains the same.

If the trade deficit increases, the current account balance becomes positive.

If the trade surplus decreases, the current account balance becomes more positive.

If the trade deficit increases, the current account balance becomes more negative.

If the trade deficit increases, the current account balance becomes more negative.

If the trade deficit is increasing, imports must be growing at a faster rate than exports. This results in a decrease in the trade balance and, consequently, a decrease in the current account balance.

The table shows the amounts, in millions of dollars, of balances of various current account components for a nation in 2017. Use the information in the table to calculate the current account balance for 2017.

-26506 million

The current account balance is the summation of the four main components (all of which are included as columns in the table) of the current account.

Therefore:

2017 Current Account Balance = −$39851 + $14681 + $8253 + (−$9589)

2017 Current Account Balance = −$26506 million

Which of the following best defines the balance of trade?

Select the correct answer below:

the gap between a nation’s dollar value of its exports and a nation’s dollar value of imports

the difference in GDP between two nations

how willing a nation is willing to trade with the international community

all of the above

the gap between a nation’s dollar value of its exports and a nation’s dollar value of imports

The connection between trade balances and international flows of financial capital is so close that the balance of trade is sometimes described as the balance of payments. Each category of the current account balance involves a corresponding flow of payments between a given country and the rest of the world economy.
 

Which of the following are considered income payments?

Select all that apply:

money received by U.S. financial investors on foreign investments

national savings and investment identity

both a nation's exports and imports

payments to foreign investors who have invested their funds in the United States

money received by U.S. financial investors on foreign investments

payments to foreign investors who have invested their funds in the United States

Income payments, also referred to as net investment income, are part of the current account. These payments represent money received by U.S. financial investors on foreign investments as well as payments to foreign investors who have invested their funds in the United States.

The table shows the amounts, in millions of dollars, of balances of various current account components. Using the information in the table, what is the amount (in millions of dollars) of unilateral transfers for Year 2?

-400 million

The current account balance is the summation of the four main components (all of which are included as columns in the table) of the current account.

Therefore:

For Year 2 : −$292 + $1434 + 418 + Unilateral Transfers = $1160

For Year 2:  $1560 + Unilateral Transfers = $1160

Unilateral Transfers for Year 2 = $1160 - $1560

Unilateral Transfers for Year 2 = −$400 million