International Economics 3rd Edition By Robert C. Feenstra - Test Bank

International Economics 3rd Edition By Robert C. Feenstra – Test Bank

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Sample Questions Are Posted Below

1.	The Mariel boatlift of Cuban immigrants into Miami caused the:
	A)	population of unskilled workers in Miami to decline.
	B)	population of skilled workers in Miami to decline.
	C)	supply of labor to increase, but it did not decrease the wages.
	D)	wages of all workers to decline.
	Ans: C Difficulty: Easy Section: Introduction Skill Descriptor: Fact-Based Topic: Introduction

2.	The immigration of Russian Jews to Israel:
	A)	increased the population of Israel and caused wages to plummet.
	B)	decreased the native population of Israel.
	C)	increased the population of skilled workers but did not decrease wages.
	D)	caused wages of skilled workers to decrease.
	Ans: C Difficulty: Easy Section: Introduction Skill Descriptor: Fact-Based Topic: Introduction

3.	The results of the influx of workers into Miami in 1980 as a consequence of the Mariel boatlift and from Russia to Israel in 1989 after the fall of the Soviet Union:
	A)	were different: wages fell in Miami but rose in Israel.
	B)	were similar: wages fell in Israel but rose in Miami.
	C)	surprised most people because the outcome was no reduction in wages in either area.
	D)	were that wages fell in both regions, confirming that immigration hurts domestic workers.
	Ans: C Difficulty: Easy Section: Introduction Skill Descriptor: Fact-Based Topic: Introduction

4.	Interesting real-life examples tell us that labor migration often:
	A)	reduces wages in both the source nation and the destination nation.
	B)	has no negative effect on wages in the destination nation.
	C)	increases labor productivity.
	D)	changes the labor market so that competition for workers rises.
	Ans: B Difficulty: Moderate Section: Introduction Skill Descriptor: Fact-Based Topic: Introduction

5.	When some factors are fixed, it is a short-run model. This is called ____________ model.
	A)	the Heckscher-Ohlin
	B)	the Ricardian
	C)	the specific-factors
	D)	the purchasing power parity
	Ans: C Difficulty: Easy Section: Introduction Skill Descriptor: Concept-Based Topic: Introduction

6.	To study labor migration using the specific-factors model, we assume ________ and ________ cannot move within the domestic economy, but we allow ________ to move both domestically and internationally.
	A)	land; capital; labor
	B)	labor; land; capital
	C)	land; loanable funds; capital
	D)	labor; capital; land
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

7.	When we use the specific-factors model to study immigration, we assume that:
	A)	land is immobile internationally but capital and labor are internationally mobile.
	B)	land and capital are immobile internationally but labor is internationally mobile.
	C)	land, labor, and capital are internationally mobile.
	D)	land, labor, and capital are internationally immobile.
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

8.	Which model can we use to analyze the short-run effects of migration?
	A)	specific-factors
	B)	Ricardian
	C)	Heckscher-Ohlin
	D)	purchasing power parity
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

9.	When the supply of labor increases, according to the specific-factors model, which of the following is NOT likely to happen?
	A)	The number of workers employed will increase.
	B)	The wages for workers will decline.
	C)	The marginal product of labor shifts to the right.
	D)	The overall wage in the economy increases in the short run.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Short Run: Specific-Factors Model

10.	When the supply of labor increases, according to the specific-factors model, which of the following is likely to happen in the sending country?
	A)	The number of workers employed will decrease.
	B)	The wages for workers will rise.
	C)	The marginal product of labor shifts to the right.
	D)	All of these are likely to happen in the sending country.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Short Run: Specific-Factors Model

11.	The specific-factors model predicts that after immigration, the equilibrium wage in both industries in the destination nation:
	A)	rises.
	B)	falls.
	C)	remains the same.
	D)	cannot be determined with the information given.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Short Run: Specific-Factors Model

12.	If a person leaves Sweden to work in the United States, she is said to ________from Sweden and __________to the United States.
	A)	immigrate; emigrate
	B)	emigrate; immigrate
	C)	immigrate; immigrate
	D)	emigrate; emigrate
	Ans: B Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Definitional Topic: Effects of Immigration in the Short Run: Specific-Factors Model

13.	One example of emigration from Europe was during the period between 1870 and 1913. Wages grew rather than declined in the destination nations of the United States, Canada, and Australia. Why?
	A)	The economic theory did not predict well.
	B)	Workers from Europe were highly skilled and raised the equilibrium wage.
	C)	The government stepped in and raised the minimum wage.
	D)	Wages rose due to the industrial revolution and higher levels of capital but grew more slowly because of the immigration.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

14.	Large-scale immigration into the New World, between 1870 and 1913 caused the real wages to:
	A)	decrease in comparison with Europe.
	B)	increase at a slower pace in comparison with Europe.
	C)	increase at a higher pace in comparison with Europe.
	D)	stay constant.
	Ans: B Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

15.	The large-scale labor migration that occurred during 1870 to 1913 from Europe to America ____ wages in the destination nations and ____ wages in the source nations, thus leading to _____ of wages between the regions.
	A)	lowered; raised; convergence
	B)	raised; raised; divergence
	C)	lowered; lowered; divergence
	D)	raised; lowered; convergence
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

16.	Between 1870 and 1913, labor migration from the “Old World” (Europe) to the “New World” (the United States, Canada, and Australia) caused:
	A)	real wages to rise in the New World.
	B)	real wages to fall in the Old World.
	C)	real wages to diverge between the New and Old Worlds.
	D)	real wages to converge between the New and Old Worlds.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

17.	Between 1870 and 1913, labor migration from the “Old World” (Europe) to the “New World” (the United States, Canada, and Australia):
	A)	decreased the rate of growth of real wages in the New World and increased the rate of growth of real wages in the Old World.
	B)	increased the rate of growth of real wages in the New World and decreased the rate of growth of real wages in the Old World.
	C)	decreased the rate of growth of real wages in both the New and Old Worlds.
	D)	increased the rate of growth of real wages in both the New and Old Worlds.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

18.	Emigration and immigration are:
	A)	when workers leave and workers come in.
	B)	two ways of saying workers are coming in.
	C)	when workers come in and workers leave.
	D)	two ways of saying workers leave.
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Definitional Topic: Effects of Immigration in the Short Run: Specific-Factors Model

19.	The specific-factors model can also apply to recent immigration into the United States. There are two major categories of U.S. immigrants:
	A)	male and female.
	B)	young and middle-aged.
	C)	very low skilled and highly educated and skilled.
	D)	middle-income artisans and performance artists.
	Ans: C Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

20.	U.S. immigrants from Mexico are mainly _________workers and U.S. immigrants from India are mainly ___________workers.
	A)	low-skilled; highly skilled
	B)	middle-income artisans; performance artists
	C)	male; female
	D)	younger; older
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

21.	Which group of U.S. citizens competes with illegal immigrants in the United States?
	A)	medical doctors
	B)	high school dropouts
	C)	college graduates
	D)	all U.S. citizens
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

22.	The H1-B visa program is designed:
	A)	to keep out undocumented workers.
	B)	to encourage bright U.S. college students to study abroad.
	C)	to attract scientists and engineers from other nations to help U.S. industry prosper.
	D)	to have a way to force foreign students to go back to their native lands after graduation.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

23.	Of the 10% of the U.S. work force with advanced (Master’s, other professional, and Ph.D.) degrees, the share of those who are foreign born is:
	A)	more than 50%.
	B)	between 16 and 40%.
	C)	less than 15%.
	D)	less than 5%.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

24.	The combination of legal and illegal immigrants in the United States creates a U-shaped pattern between the number of immigrants and:
	A)	wages of competing American workers.
	B)	their wages.
	C)	their educational level.
	D)	their jobs.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

25.	Foreign-born workers in the United States tend to:
	A)	be poorly educated (high school dropouts) or very highly educated (graduate degrees).
	B)	be mainly very poorly educated.
	C)	be mainly very highly educated.
	D)	have educational levels similar to U.S.-born workers.
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

26.	In the United States the share of foreign-born workers with 12 years of education or less is:
	A)	less than 10%.
	B)	less than 50%.
	C)	more than 70%.
	D)	negligible.
	Ans: C Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

27.	Illegal immigrants into the United States tend to compete mainly with:
	A)	highly educated American workers.
	B)	poorly educated American workers.
	C)	all American workers.
	D)	one another.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

28.	Legal immigrants into the United States tend to compete mainly with:
	A)	highly educated American workers.
	B)	poorly educated American workers.
	C)	all American workers.
	D)	one another.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

29.	Because most immigrants into the United States are either highly skilled or unskilled, the majority of workers:
	A)	see very little impact on their wages as a result of immigration.
	B)	have difficulty finding jobs and getting raises because of all the competition from immigrants.
	C)	feel a big hit on wages and unemployment.
	D)	must rely on trade adjustment assistance for help retraining and relocating.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Effects of Immigration in the Short Run: Specific-Factors Model

30.	In the specific-factors model, migration of labor will cause:
	A)	the wage to rise in the receiving country and the wage to fall in the sending country.
	B)	the wage to fall in the receiving country and the wage to rise in the sending country.
	C)	the wage to rise in both the receiving and sending countries.
	D)	the wage to fall in both the receiving and sending countries.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

31.	In the specific-factors model, labor migration from Mexico to the United States will cause _________ in U.S. low-skilled wages and _________ in Mexican low-skilled wages.
	A)	increases; decreases
	B)	increases; increases
	C)	decreases; decreases
	D)	decreases; increases
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

32.	If capital is specific to manufacturing and land is specific to agriculture, then migration of labor from low-income to high-income countries will cause:
	A)	the wage to rise in the high-income country and the wage to fall in the low-income country.
	B)	the wage to fall in the high-income country and the wage to rise in the low-income country.
	C)	the wage to rise in both the high-income and low-income countries.
	D)	the wage to fall in both the high-income and low-income countries.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

33.	Emigration causes __________ in the capital–labor ratio and __________ in the return to capital.
	A)	increases; decreases
	B)	increases; increases
	C)	decreases; decreases
	D)	decreases; increases
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

34.	Immigration causes __________ in the capital–labor ratio and __________ in the return to capital.
	A)	increases; decreases
	B)	increases; increases
	C)	decreases; decreases
	D)	decreases; increases
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

35.	What is the likely attitude of owners of capital and land toward immigration?
	A)	They are likely to support closing the borders to foreign labor.
	B)	They are likely to support more open borders and an influx of workers.
	C)	They are not likely to worry about immigration issues,
	D)	They are likely to reject legislation easing rules on immigration.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Other Effects of Immigration in the Short Run

36.	In destination countries, as immigration occurs and more labor is employed, in the short run, wages fall and the marginal products of land and capital (fixed resources):
	A)	are unaffected.
	B)	both rise.
	C)	both fall.
	D)	rise for one and fall for the other.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

37.	In destination countries, as immigration occurs and more labor is employed, in the short run, wages fall and the rental (return to) of land and capital (fixed resources):
	A)	are unaffected.
	B)	both rise.
	C)	both fall.
	D)	rise for one and fall for the other.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

38.	Because immigration raises the marginal products and the return to non-labor factors of production, in the short run owners of non-labor resources often support:
	A)	open borders.
	B)	tighter restrictions on immigration.
	C)	controls on the flow of foreign direct investment (FDI).
	D)	immigration of persons only for humanitarian reasons.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Other Effects of Immigration in the Short Run

39.	U.S. and European immigration policies are best described as welcoming:
	A)	all foreign workers.
	B)	foreign workers in most industries.
	C)	foreign workers in select industries.
	D)	no foreign workers.
	Ans: C Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Other Effects of Immigration in the Short Run

40.	The effect of immigration on industry output in the short run is:
	A)	to lower it across all industry.
	B)	to raise it in sectors that do not get immigrant workers but lower it where immigrants are employed.
	C)	that, surprisingly, additional workers are employed, but there is no effect on industry output.
	D)	that it raises industry output overall, and the rise is skewed so industries employing immigrants rise by more—thus shifting the PPF.
	Ans: D Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

41.	Which legislation would U.S. labor unions support?
	A)	legislation to eliminate all restrictions on immigration
	B)	legislation to increase direct foreign investment in the United States
	C)	legislation to ease rules on immigration
	D)	Labor unions would support all of these measures.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Other Effects of Immigration in the Short Run

42.	In the specific-factors model, immigration causes:
	A)	a rightward shift in the receiving country’s production possibilities frontier.
	B)	a leftward shift in the receiving country’s production possibilities frontier.
	C)	no change in the receiving country’s production possibilities frontier.
	D)	a rightward shift in the sending country’s production possibilities frontier.
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

43.	Suppose labor and capital are the only two resources used for production. In the short run:
	A)	only capital can move freely between sectors.
	B)	only labor can move freely between sectors.
	C)	both capital and labor can move freely between sectors.
	D)	both resources are restricted in their movement.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Other Effects of Immigration in the Short Run

44.	Which of the following events will cause the production possibility frontier to shift outward (to the right)?
	A)	a natural disaster that causes widespread damage
	B)	a computer problem that affects all business that rely on computers
	C)	a wave of immigration caused by new easier rules
	D)	a war that destroys the nation’s infrastructure
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Other Effects of Immigration in the Short Run

45.	Suppose labor and capital are the only two resources used for production. In the long run:
	A)	both capital and labor can move freely between sectors.
	B)	only labor can move between sectors.
	C)	only capital can move between sectors.
	D)	both capital and labor are blocked from moving between sectors.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

46.	In order to analyze migration in the long run, it is appropriate to use:
	A)	the specific-factors model with free movement of labor across borders.
	B)	the Heckscher-Ohlin model with free movement of labor across borders.
	C)	the Ricardian model with no movement of labor across borders.
	D)	the PPF modified for three goods, three factors of production (all fixed), and three nations.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

47.	In the specific-factors model, how will immigration affect the sending country’s production possibilities frontier?
	A)	It will shift it to the right.
	B)	It will shift it to the left.
	C)	It will not affect its production possibilities curve.
	D)	Immigration will first shift it to the left, then shift it back to its original position.
	Ans: B Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

48.	Which is the best approach to analyzing migration in the long run?
	A)	the specific-factors model with no resource mobility across borders
	B)	the specific-factors model with free movement of labor across borders
	C)	the Heckscher-Ohlin model with free movement of labor across borders
	D)	the Heckscher-Ohlin model with no resource mobility across borders
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

49.	Consider an economy that only produces steel and shoes; steel is capital intensive and shoes are labor intensive. Which industry has a lower capital-labor ratio?
	A)	steel
	B)	shoes
	C)	neither steel nor shoes
	D)	The capital-labor ratios are identical in steel and shoes.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

50.	In the long run, immigration will lead to a rightward shift in the receiving country’s production possibilities frontier. As a result, this shift will:
	A)	favor the labor-intensive good.
	B)	favor the capital-intensive good.
	C)	equally favor the labor-intensive and the capital-intensive good.
	D)	cause an increase in the production of the labor-intensive good and a decrease in the capital-intensive good.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

51.	In the long run, immigration will shift the sending country’s production possibilities frontier inward. This shift will cause:
	A)	a larger decline in the potential output of the capital-intensive good.
	B)	a larger decline in the potential output of the labor-intensive good.
	C)	equal declines in the potential output of both the labor-intensive and the capital-intensive good.
	D)	a decline in the potential output of the labor-intensive good and an increase in the potential output of the capital-intensive good.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

52.	In the HO model, a “box diagram” describes the distribution of:
	A)	output between the two producing sectors in a country.
	B)	output between the two countries of the model.
	C)	labor and capital between the two producing sectors of a country.
	D)	labor between the two countries of the model.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

53.	When factors of production are not fixed (as in the long run) and labor immigrates, capital will:
	A)	remain fixed because capital is never mobile.
	B)	increase in the capital-intensive industry.
	C)	move to the higher productivity use in the labor-intensive industry until returns are again equalized.
	D)	become idled as owners of capital seek more profitable opportunities.
	Ans: C Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

54.	Consider a hypothetical economy in which only computers and shoes are produced and in which computer production is capital intensive as compared with shoe production. If two resources are being used, labor and capital, then the capital-labor ratio would be:
	A)	higher in the shoe industry.
	B)	lower in the computer industry.
	C)	the same in both industries.
	D)	higher in the computer industry.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

55.	Consider an economy that only produces steel and shoes; steel is capital intensive and shoes are labor intensive. How will emigration of labor from this economy affect the marginal productivity of labor?
	A)	It will fall.
	B)	It will not change.
	C)	It will rise.
	D)	It will fall in the short run and rise in the long run.
	Ans: B Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

56.	In the long run (the HO model), immigration will lead to:
	A)	an increase in the production of both the labor-intensive and the capital-intensive goods in the receiving country.
	B)	an increase in the production of the labor-intensive good and a decrease in the production of the capital-intensive good in the receiving country.
	C)	a decrease in the production of both the labor-intensive and the capital-intensive goods in the receiving country.
	D)	a decrease in the production of the labor-intensive and an increase in the production of the capital-intensive good in the receiving country.
	Ans: B Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

57.	In the long run, when there is immigration of labor and all domestic factors of production are mobile:
	A)	resources move out of the labor-intensive industry into the other sectors of the economy.
	B)	the excess labor cannot be absorbed into the economy, and eventually workers will seek to emigrate.
	C)	the excess labor is absorbed, but it raises the unemployment rate and drives down wages, and the owners of capital are the clear winners.
	D)	the capital-labor ratio in each industry is unchanged, and the additional labor in the economy is fully employed.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

58.	Consider an economy that only produces steel and shoes; steel is capital intensive and shoes are labor intensive. How will emigration of labor from this economy affect production?
	A)	Production of both the labor-intensive and the capital-intensive good will rise.
	B)	Production of both the labor-intensive and capital-intensive good will fall.
	C)	Production of the labor-intensive good will rise and production of the capital-intensive good will fall.
	D)	Production of the labor-intensive good will fall and production of the capital-intensive good will rise.
	Ans: D Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

59.	Because the capital-labor ratio will be unchanged in the long run, how will immigration affect the MPs and returns to factors of production?
	A)	They will not change.
	B)	They will fall.
	C)	They will rise.
	D)	They will rise in the short run, but fall in the long run.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

60.	In the long run (the HO model), immigration will lead to:
	A)	an increase in the price of both the labor-intensive and the capital-intensive goods in the receiving country.
	B)	an increase in the price of the labor-intensive good and a decrease in the price of the capital-intensive good in the receiving country.
	C)	a decrease in the price of both the labor-intensive and the capital-intensive goods in the receiving country.
	D)	no change in the price of either the labor-intensive or the capital-intensive good in the receiving country.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

61.	In the long run, which of the following will occur if the U.S. federal government eliminates restrictions on migration of Mexican workers to the United States?
	A)	The United States’ total K/L ratio will rise.
	B)	Mexico’s total K/L ratio will fall.
	C)	Wages of American workers who compete with Mexican workers for jobs will rise.
	D)	The returns to U.S. owners of capital will remain unchanged.
	Ans: D Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Effects of Immigration in the Long Run

62.	In the long run (the HO model), immigration will lead to:
	A)	an increase in the wage and a decrease in the return to capital in the receiving country.
	B)	an increase in both the wage and the return to capital in the receiving country.
	C)	a decrease in the wage and an increase in the return to capital in the receiving country.
	D)	no change in the wage and the return to capital in the receiving country.
	Ans: D Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

63.	For the sending country, what will be the long-run effects of immigration on wages and the return to capital?
	A)	The wage will increase, and the return to capital will decrease.
	B)	The wage will decrease, and the return to capital will increase.
	C)	Both the wage and the return to capital will increase.
	D)	There will be no change in the wage and the return to capital.
	Ans: D Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

64.	Consider a hypothetical economy in which only computers and shoes are produced and in which computer production is capital intensive compared with shoe production. If two resources are being used, labor and capital, then any increase in immigration in the long run:
	A)	will cause the capital-labor ratio to increase in the computer industry.
	B)	will cause the capital-labor ratio to increase in the shoe industry.
	C)	will cause the capital-labor ratio to increase in both the industries.
	D)	will increase the number of workers employed in the shoe industry.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

65.	Consider a hypothetical economy in which only computers and shoes are produced. If two resources are being used, labor and capital, then any increase in immigration in the long run:
	A)	will decrease wages in the shoe industry.
	B)	will decrease wages in the computer industry.
	C)	will increase wages in the shoe industry.
	D)	will keep wages constant because marginal products do not change.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

66.	In an economy with two industries, an increase in immigration will:
	A)	cause employment to increase in both in the long run.
	B)	cause employment to increase in one and decrease in the other in the short run.
	C)	cause employment to increase in one and decrease in the other in the long run.
	D)	cause a decline in wages in both industries in the long run.
	Ans: C Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

67.	In the long run (the HO model), immigration will lead to:
	A)	a rightward shift in the receiving country’s production possibilities frontier.
	B)	a leftward shift in the receiving country’s production possibilities frontier.
	C)	no change in the receiving country’s production possibilities frontier.
	D)	a rightward shift in the sending country’s production possibilities frontier.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Effects of Immigration in the Long Run

68.	What is the long-run effect of immigration on capital use in the receiving country?
	A)	There will be no change because the remaining capital is not mobile.
	B)	Capital will move to the capital-intensive industry.
	C)	The return to capital (rental) will fall.
	D)	Capital will move to the labor-intensive industry.
	Ans: D Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

69.	In the long run, how will immigration affect the labor-intensive industry’s output?
	A)	It will not change.
	B)	It will fall.
	C)	It will rise.
	D)	It will equal zero.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

70.	Which of the following is NOT a long-run impact of labor immigration?
	A)	Production of labor-intensive industries will increase.
	B)	Production of capital-intensive industries will decrease.
	C)	There will be a shift of labor and capital into labor-intensive industries.
	D)	The PPF will shift inward.
	Ans: D Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

71.	In the Heckscher-Ohlin model with two goods and two factors, an increase in one factor will cause:
	A)	an increase in the production of the good that uses the factor intensively.
	B)	a decrease in the production of the good that use the factor intensively.
	C)	an increase in the production of the good that does not use the factor intensively.
	D)	no change in the production of both goods.
	Ans: A Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

72.	What is the effect of immigration in the long run?
	A)	Output will increase.
	B)	Factor prices will increase.
	C)	There will be no change in factor prices.
	D)	There will be an increase in output but no change in factor prices.
	Ans: D Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

73.	What is the overall long-run impact of labor immigration on returns to factors of production?
	A)	Returns to labor will increase and returns to capital will decrease.
	B)	Returns to labor and returns to capital will both increase.
	C)	Both relative and absolute returns to factors of production will not change.
	D)	Both relative and absolute returns to factors of production will increase.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Long Run

74.	The hypothesis that the results of a long-run Heckscher-Ohlin model with labor immigration will result in an increase in production for the labor-intensive industry while reducing production in the capital-intensive industry is known as the _____ theorem.
	A)	Stolper-Samuelson
	B)	specific-factors
	C)	Ricardian
	D)	Rybczynski
	Ans: D Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Rybczynski Theorem

75.	A corollary to the Rybczynski theorem is that in the long run, prices of factors will not be affected. This is known as:
	A)	the Friedman corollary.
	B)	the Marshall-Lerner condition.
	C)	the factor price insensitivity result.
	D)	the Stolper-Samuelson prediction.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Rybczynski Theorem

76.	According to the Rybczynski theorem, immigration will cause:
	A)	an increase in the output of the labor-intensive good and a decrease in the output of the capital-intensive good in the receiving country.
	B)	an increase in the output of both the labor-intensive and the capital-intensive goods in the receiving country.
	C)	a decrease in the output of the labor-intensive good and an increase in the output of the capital-intensive good in the receiving country.
	D)	decreases in the output of both the labor-intensive and the capital-intensive good in the receiving country.
	Ans: A Difficulty: Moderate Section: Movement of Labor between Countries: Migration Skill Descriptor: Concept-Based Topic: Rybczynski Theorem

77.	According to the Rybczynski theorem, how will immigration of unskilled labor from Mexico to the United States affect the Mexican economy?
	A)	Mexico’s production of capital-intensive products will increase.
	B)	Mexico’s production of labor-intensive products will decrease.
	C)	Wages of Mexican workers will increase.
	D)	Wages of Mexican workers will decrease.
	Ans: B Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Rybczynski Theorem

78.	In the Heckscher-Ohlin model, which of the following is the term used to describe the absorption of an increase in a factor with changes in sector outputs without any change in factor prices?
	A)	factor price insensitivity
	B)	factor price equalization
	C)	factor price theorem
	D)	factor price absorption
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Definitional Topic: Rybczynski Theorem

79.	According to the Rybczynski theorem, how will immigration affect the sending country’s production of labor-intensive and capital-intensive goods?
	A)	Production of the labor-intensive goods will increase and production of capital-intensive goods will decrease.
	B)	Production of both labor-intensive and the capital-intensive goods will increase.
	C)	Production of labor-intensive goods will decrease and production of capital-intensive goods will increase.
	D)	Production of both labor-intensive and capital-intensive goods will decrease.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Rybczynski Theorem

80.	In the long run, which of the following will occur if the U.S. federal government eliminates restrictions on migration of Mexican workers to the United States?
	A)	U.S. production of labor-intensive goods will increase.
	B)	U.S. production of both labor-intensive and capital-intensive goods will increase.
	C)	U.S. production of capital-intensive goods will increase.
	D)	Mexican production of labor-intensive goods will increase.
	Ans: A Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Factor Price Insensitivity Theorem

81.	During the past 10 to 20 years, a considerable amount of foreign capital has flowed into China. What is an implication of capital flow on the composition of Chinese trade?
	A)	There should be no change in the composition of China’s trade.
	B)	There should be a shift toward the export of more labor-intensive products.
	C)	There should be a shift toward the export of more capital-intensive products.
	D)	There should be a shift toward the import of more capital-intensive products.
	Ans: C Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Factor Price Insensitivity Theorem

82.	A study of the results of the Mariel boatlift on wages in Miami found:
	A)	significant declines in wages for unskilled workers.
	B)	no significant decline in wages for unskilled workers due to a trend to substitute employment of low-skill workers for more expensive technology such as computers.
	C)	ironically, a rise in wages and salaries paid to low-skill workers because the boatlift immigrants had superior technical skills.
	D)	that wages in the apparel industry collapsed, raising unemployment across the board and lowering wages of all workers in all skill categories.
	Ans: B Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Factor Price Insensitivity Theorem

83.	Skill-biased technological changes:
	A)	benefit educated workers more than uneducated workers.
	B)	benefit all workers equally.
	C)	benefit uneducated workers more than educated workers.
	D)	benefit no workers.
	Ans: A Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Factor Price Insensitivity Theorem

84.	In 2010, what percentage of the U.S. population was foreign born?
	A)	3.5%
	B)	13.5%
	C)	23.5%
	D)	33.5%
	Ans: B Difficulty: Easy Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Factor Price Insensitivity Theorem

85.	A number of studies of the effect of immigration on U.S. wages has found:
	A)	no effect on wages of any educational group.
	B)	significant rises in wages for those without a high school diploma and for college graduates but a negative impact for high school graduates and those with some college education.
	C)	significant declines in wages for those without a high school diploma and for college graduates.
	D)	no effect on other groups but significant declines in wages for high school graduates and those with some college.
	Ans: C Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Concept-Based Topic: Factor Price Insensitivity Theorem

86.	Foreign direct investment that takes the form of purchasing an existing plant is often called:
	A)	acquisition FDI.
	B)	greenfield FDI.
	C)	requisition FDI.
	D)	brownstone FDI.
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Definitional Topic: Movement of Capital Between Countries: Foreign Direct Investment

87.	Foreign direct investment that takes the form of a new startup facility is called:
	A)	acquisition FDI.
	B)	greenfield FDI.
	C)	intermediary FDI.
	D)	brownfield FDI.
	Ans: B Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Definitional Topic: Movement of Capital Between Countries: Foreign Direct Investment

88.	According to the U.S. Department of Commerce, a foreign direct investment inflow to the United States occurs whenever a foreign company acquires ____ or more of a U.S. firm.
	A)	10%
	B)	25%
	C)	51%
	D)	100%
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Fact-Based Topic: Movement of Capital Between Countries: Foreign Direct Investment

89.	The U.S. Commerce Department defines foreign direct investment as occurring when:
	A)	a U.S. company acquires at least 51% ownership of a foreign company or a foreign company acquires at least 51% ownership of a U.S. company.
	B)	a U.S. foreign company acquires an American company with 10 or more workers or a foreign company acquires a foreign company with 10 or more workers.
	C)	a U.S. company acquires at least 10% ownership of a foreign company or a foreign company acquires at least 10% ownership of a U.S. company.
	D)	there is only investment by foreign governments in American companies.
	Ans: C Difficulty: Easy Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Definitional Topic: Movement of Capital Between Countries: Foreign Direct Investment

90.	“Greenfield investment” is defined as:
	A)	a takeover of an existing company.
	B)	the construction of a new factory in a foreign company.
	C)	the hiring of at least 25 workers in a foreign company.
	D)	renting space in an office building.
	Ans: B Difficulty: Easy Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Definitional Topic: Greenfield Investment

91.	If we use the short-run (specific-factors) model to model FDI movement from one nation to another, then wages in the recipient nation:
	A)	decline absolutely.
	B)	rise as a result of an increase in the MP of labor.
	C)	are not affected.
	D)	decline relatively, as capital competes with labor but not absolutely.
	Ans: B Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

92.	In the short-run (specific-factors) model, foreign direct investment is expected to ________the marginal product of labor and ________wages in the receiving country.
	A)	decrease; decrease
	B)	increase; decrease
	C)	decrease; increase
	D)	increase; increase
	Ans: D Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

93.	According to the short-run (specific-factors) model, how will FDI affect wages in the recipient nation?
	A)	They will rise.
	B)	They will fall.
	C)	They will not affect wages.
	D)	They will fall in comparison to wages in the sending country.
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

94.	According to the short-run (specific-factors) model, how will FDI affect the marginal productivity of labor in the recipient nation?
	A)	The MPL will rise in the production of both the labor- and capital-intensive goods.
	B)	The MPL will rise only in the production of the labor-intensive good.
	C)	The MPL will rise only in the production of the capital-intensive good.
	D)	The MPL will fall in the production of both the labor and capital-intensive goods.
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

95.	As FDI flows into a nation, which of the following will happen to the marginal product of labor in the short run?
	A)	It will rise.
	B)	It will fall.
	C)	It will not change.
	D)	It will first fall then rise.
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

96.	According to the short-run (specific-factors) model, how will FDI affect the return to capital and the return to land in the recipient nation?
	A)	The returns to land and capital will both decrease.
	B)	The return to land will decrease; the return to capital will increase.
	C)	The return to land will increase; the return to capital will decrease.
	D)	The returns to land and capital will both increase.
	Ans: B Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

97.	In the short-run (specific-factors) model, foreign direct investment is expected to cause a(n) ________in the production of the capital-intensive good and a(n) ________in the production of the land-intensive good in the receiving country.
	A)	decrease; decrease
	B)	increase; decrease
	C)	decrease; increase
	D)	increase; increase
	Ans: B Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

98.	In the short-run (specific-factors) model, foreign direct investment is expected to cause a(n) ________in the return to capital and a(n) ________in the return to land in the receiving country.
	A)	decrease; decrease
	B)	increase; decrease
	C)	decrease; increase
	D)	increase; increase
	Ans: C Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

99.	In the short run (specific-factors) model, an FDI inflow into a country’s manufacturing sector will cause:
	A)	an increase in the output of the agricultural sector.
	B)	an increase in the employment in the agricultural sector.
	C)	a decrease in the employment in the manufacturing sector.
	D)	an increase in the output and employment in the manufacturing sector.
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

100.	In the short run (specific-factors) model FDI in the a country’s manufacturing sector will cause its production possibility frontier:
	A)	to shift outward for both sectors.
	B)	to shift inward.
	C)	to shift outward for manufacturing only.
	D)	to stay the same.
	Ans: C Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

101.	In the short run (specific-factors) model, what will happen to the rental rate on capital and the wage rate when there is FDI in the country?
	A)	Both the rental rate on capital and the wage rate will increase.
	B)	Both the rental rate on capital and the wage rate will decrease.
	C)	The rental rate on capital will increase and the wage rate will decrease.
	D)	The rental rate on capital will decrease and the wage rate will increase.
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

102.	In the short-run (specific factors) model, FDI will cause _______________ in the return to capital and land and _______________ in the return to labor in the recipient country.
	A)	an increase; a decrease
	B)	a decrease; an increase
	C)	no change; an increase
	D)	a decrease; no change
	Ans: B Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

103.	During the past 20 years, there has been substantial FDI in China. What are the expected short-run effects of this FDI upon the rental rate on capital and wages in China?
	A)	The rental rate should increase and wages should decrease.
	B)	The rental rate and wages should both increase.
	C)	The rental rate and wages should both decrease.
	D)	The rental rate should decrease and wages should increase.
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Critical Thinking Topic: FDI in the Short Run: Specific-Factors Model

104.	According to the long-run (Heckscher-Ohlin) model, when FDI takes place, the investment capital generally moves from:
	A)	southern hemisphere nations to northern hemisphere nations.
	B)	high-wage nations to low-wage nations.
	C)	Eastern Europe to Western Europe.
	D)	privately owned enterprises to government-owned enterprises.
	Ans: B Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Short Run: Specific-Factors Model

105.	When FDI occurs, what are the long-run effects of FDI on industry output in the recipient nation?
	A)	There is no change in either the output of the capital-intensive or the labor-intensive industry.
	B)	The labor-intensive industry expands; the capital-intensive industry contracts.
	C)	The capital-intensive industry expands; the labor-intensive industry contracts.
	D)	Both capital- and labor-intensive industries expand in the same proportion.
	Ans: C Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

106.	In the long run, an increase in FDI in the manufacturing sector will:
	A)	increase marginal product of labor in the agriculture sector.
	B)	increase marginal product of labor in the manufacturing sector.
	C)	decrease marginal product of labor in the agriculture sector.
	D)	not change the marginal product of labor in either sector.
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

107.	How can we model long-run FDI flows using a model similar to the long-run effects of long-run labor migration?
	A)	Use a simple supply-and-demand approach.
	B)	Use the Ricardian comparative advantage model.
	C)	Use the Heckscher-Ohlin model with the assumption that capital can migrate.
	D)	Use the Rybczynski theorem.
	Ans: C Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

108.	In the long run, if all resources can move within a nation, an inflow of FDI will:
	A)	increase production in the capital-intensive sectors as capital becomes cheaper.
	B)	lower the productivity of the agricultural sector.
	C)	lower wages.
	D)	decrease the production of capital-intensive goods.
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

109.	The international movement of factors of production:
	A)	is prohibited by the Geneva Convention.
	B)	is completely free of restrictions everywhere in the world.
	C)	tends to make the prices paid to factors of production among countries move further apart over time.
	D)	tends to make the prices paid to the factors of production among countries more similar over time.
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Fact-Based Topic: FDI in the Long Run

Use the following to answer question 110:

SCENARIO: TRADE IN GOODS BETWEEN CHINA AND THE UNITED STATES

(1) China has 1,000 units of capital and 3,000 workers; (2) the United States has 3,000 units of capital and 1,000 workers; (3) clothing production is labor intensive, and (4) chemical production is capital intensive.

110.	(Scenario: Trade in Goods Between China and the United States) Suppose that the United States eliminates all restrictions on immigration and Chinese workers are free to emigrate from China to the United States. How many Chinese workers must emigrate from China to the United States in order for factor price equalization to occur?
	A)	1,000
	B)	2,000
	C)	3,000
	D)	4,000
	Ans: B Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

111.	In the long run, which of the following explains why are there no changes to returns to capital and wages when FDI or labor immigration occurs?
	A)	World prices of output are unchanged.
	B)	Marginal productivities are unchanged.
	C)	There is no change in the capital-labor ration in either industry.
	D)	World prices of output and marginal productivities are unchanged.
	Ans: C Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

112.	In the long run, an increase in FDI in the manufacturing sector will __________ the return to capital in the ____________ sector(s).
	A)	decrease; agriculture
	B)	increase; manufacturing
	C)	decrease; manufacturing
	D)	not change; manufacturing or agriculture
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

Use the following to answer question 113:

SCENARIO: TRADE IN GOODS BETWEEN MEXICO AND THE UNITED STATES

(1) Mexico has 2,000 units of capital and 2,000 workers; (2) the United States has 6,000 units of capital and 4,000 workers; (3) clothing production is labor intensive, and (4) chemical production is capital intensive.

113.	(Scenario: Trade in Goods Between Mexico and the United States) Suppose that the United States eliminates all restrictions on immigration from Mexico. How many Mexican workers must emigrate to the United States in order for factor price equalization to occur?
	A)	500
	B)	1,000
	C)	1,500
	D)	2,000
	Ans: A Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

114.	Which of the following is a key assumption in factor price insensitivity in response to a fall in FDI?
	A)	Technology is changing in the capital-intensive sector.
	B)	Technology is changing in the labor-intensive sector.
	C)	Prices are changing for the capital-intensive good.
	D)	None of these is a key assumption.
	Ans: D Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Concept-Based Topic: FDI in the Long Run

115.	Which of the following BEST describes the short-run effects of FDI inflows to Singapore during the latter part of the twentieth century?
	A)	The effects contradicted the specific-factors model because wages fell, while the rental on capital rose.
	B)	The effects confirmed the specific-factors model because wages rose, while the rental on capital fell.
	C)	FDI did not have any measurable effects on either wages or the rental on capital in Singapore.
	D)	FDI confounded economists because both the rental on capital rose and wages rose in Singapore.
	Ans: B Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Critical Thinking Topic: FDI in the Long Run

116.	Suppose that FDI has “spillover” benefits for the recipient nation (such as spurring technological innovation, more FDI, or growth in labor productivity). These spillover effects might help explain why:
	A)	in Singapore, wages fell in the short run.
	B)	in Singapore, wages fell and returns to capital rose in the long run.
	C)	in Singapore, wages rose and, depending on the calculation used, returns to capital were close to original levels in the long run, which contradicted the HO model.
	D)	in Singapore, absolutely nothing changed in either the short or the long run.
	Ans: C Difficulty: Difficult Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Concept-Based Topic: FDI in the Long Run

117.	Without productivity growth, what is the long run the effect of labor migration?
	A)	There will be an increase in production in the sector using labor (or capital) intensively.
	B)	There will be clear gains to owners of capital versus labor.
	C)	There will be clear gains to labor versus owners of capital.
	D)	There will be a shift of world resources toward the high-income nations.
	Ans: A Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Concept-Based Topic: FDI in the Long Run

118.	Without productivity growth, what is the long-run effect of labor migration on the receiving country?
	A)	There will be an increase in production of the labor-intensive good.
	B)	Wages will fall.
	C)	Returns to capital will increase.
	D)	None of these is the long-run effect.
	Ans: A Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Concept-Based Topic: Gains from Labor and Capital Flows

119.	Measuring the effects of labor immigration shows:
	A)	that as workers move, they disrupt their families and cause huge costs in the recipient nation.
	B)	that most immigrants spend months trying to find work.
	C)	that immigration benefits the recipient nation by raising the marginal product of capital, expanding labor-intensive production, and lowering prices of labor-intensive goods.
	D)	that immigration is very harmful to the host nation because of a huge increase in the unemployment rate.
	Ans: C Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Analytical Thinking Topic: Gains from Labor and Capital Flows

120.	In the short run, which of the following will reduce the gains from labor migration to the recipient nation?
	A)	Workers remit less than the value of their marginal products.
	B)	Migrant workers have a declining marginal product so that the equilibrium wage is lower than MPs of earlier immigrants.
	C)	Immigrants are low cost in terms of adjustment costs such as crime prevention, language assimilation, and few children enrolled in school.
	D)	Workers remit more than the value of their marginal products.
	Ans: D Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Analytical Thinking Topic: Gains from Immigration

121.	Which of the following would one expect if there were no trade in goods but resources were free to move among countries?
	A)	Labor will immigrate from the capital-abundant country.
	B)	Labor will emigrate to the capital-abundant country.
	C)	Labor will emigrate to the capital-scarce country.
	D)	Labor will immigrate from the capital-scarce country.
	Ans: B Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Analytical Thinking Topic: Gains from Immigration

122.	Which of the following statements does NOT describe the effect(s) of labor immigration?
	A)	The source nation benefits from remittances and a rise in the overall marginal product of labor as surplus workers emigrate.
	B)	Emigrating workers take skills and talent, and the marginal product of labor declines in the source nation, thus reducing the benefit.
	C)	Emigration of workers usually raises the real wage of workers left behind in the source nation.
	D)	The source nation experiences a decline in the overall marginal product of labor as surplus workers emigrate.
	Ans: D Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Critical Thinking Topic: Gains from Immigration

123.	In the very long run, theoretically there will be equilibrium if capital and labor are free to migrate. If and when this ever happens, what will the global economy experience?
	A)	an equality of wages and marginal product
	B)	an equality of returns to the owners of capital
	C)	a fully Pareto-efficient world economy with the highest standard of living possible
	D)	an equality of wages and marginal product, an equality of returns to the owners of capital, and a fully Pareto-efficient world economy with the highest standard of living possible
	Ans: D Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Analytical Thinking; analytical-thinking Topic: Gains from Immigration

124.	Which of the following is a key assumption in proving the gains from immigration?
	A)	Immigrants are generally high skilled.
	B)	The productivity of labor rises as the number of workers rises.
	C)	Immigrants are generally low skilled.
	D)	The productivity of labor falls as the number of workers rises.
	Ans: D Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Concept-Based Topic: Gains from Immigration

125.	Which of the following terms is used to describe payments made by foreign resident workers to families in their home nations or in the form of taxes paid to their home nations?
	A)	worker redistribution
	B)	worker earnings
	C)	worker remittances
	D)	worker repayments
	Ans: C Difficulty: Easy Section: Gains from Labor and Capital Flows Skill Descriptor: Definitional Topic: Gains from Immigration

126.	Some economists have proposed a “brain drain” tax to be administered though the United Nations. This tax would:
	A)	Compensate firms that hire people who need remedial reading and writing skills to be able to function in an advanced economy.
	B)	repay the nations of origin of highly educated immigrants for their losses.
	C)	force immigrants to pay taxes where they work instead of where they live.
	D)	require the national government to pay taxes to states to recover the cost of educating immigrants.
	Ans: B Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Critical Thinking Topic: Gains from Immigration

127.	The gains from immigration of labor or capital to the recipient nation can be summarized as:
	A)	the total cost of acquiring new resources versus the cost of using domestic resources.
	B)	the increase in prices minus the increase in the unemployment rate.
	C)	the gain in domestic real GDP minus costs from immigration.
	D)	the impact on the ability of labor unions to attract new members and the ability of domestic firms to retain profits.
	Ans: C Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Critical Thinking Topic: Gains from Immigration

128.	Which of the following is nearly always TRUE of highly educated immigrants?
	A)	They impose high costs on the recipient nation.
	B)	They move from high-wage nations to low-wage nations.
	C)	They impose costs on the source nation in terms of lost opportunity and provide benefits to the recipient nation.
	D)	They impose high costs on the recipient nation, and they move from high-wage nations to low-wage nations.
	Ans: C Difficulty: Easy Section: Gains from Labor and Capital Flows Skill Descriptor: Critical Thinking Topic: Gains from Immigration

129.	The economic benefit to immigrating workers is:
	A)	political freedom and ideological peace.
	B)	living in a nation where they do not have to pay taxes and receive many free social services.
	C)	the chance to be free from discrimination and poverty.
	D)	the present value of higher wages minus the value of the costs involved with the immigration process.
	Ans: D Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Concept-Based Topic: Gains from Immigration

130.	Economists conclude that the effect on our world’s standard of living as a result of labor and capital migration has been:
	A)	negative overall.
	B)	positive overall as resources move to their highest-valued use.
	C)	positive in some respects but very harmful in the long run to workers.
	D)	so small worldwide that the effect is not worth measuring.
	Ans: B Difficulty: Easy Section: Gains from Labor and Capital Flows Skill Descriptor: Critical Thinking Topic: Gains from Immigration

131.	Economist George Borjas has estimated the net benefits (+)/costs (–) to the United States from labor immigration to be approximately:
	A)	+10% of GDP.
	B)	–5% of GDP.
	C)	+0.1% of GDP.
	D)	0.5% capital loses and 0.8% labor gains.
	Ans: C Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Fact-Based Topic: Gains from Immigration

132.	Economists who have studied the impact of immigration on world welfare generally find after considering impacts on all constituencies that world GDP has _______ as a result of immigration of workers and FDI.
	A)	decreased
	B)	risen
	C)	remained constant
	D)	decreased sharply
	Ans: B Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Fact-Based Topic: Gains from Immigration

133.	As of 2005 the European Union had:
	A)	5 members.
	B)	15 members.
	C)	25 members.
	D)	40 members.
	Ans: C Difficulty: Easy Section: Gains from Labor and Capital Flows Skill Descriptor: Fact-Based Topic: Gains from Immigration

Use the following to answer questions 134-135:

Figure: Wages in Home and Foreign

134.	(Figure: Wages in Home and Foreign) Using the graph, which of the following are the value gains to the home country if some of its workers are allowed to migrate to the foreign country?
	A)	200 workers
	B)	$300
	C)	$500
	D)	$7,500
	Ans: C Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Analytical Thinking Topic: Gains from Immigration

135.	(Figure: Wages in Home and Foreign) What potential costs might offset some of the gains determined above?
	A)	moving costs
	B)	higher living costs
	C)	payments to agents to arrange migration (such as traffickers who arrange illegal migration or lawyers who arrange legal migration)
	D)	All of these are potential costs of migration.
	Ans: D Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Critical Thinking Topic: Gains from Immigration

136.	According to economists, which of the following statements about international capital mobility is CORRECT?
	A)	International resource mobility has had no effect upon world GDP.
	B)	International resource mobility has had a negative effect upon world GDP.
	C)	International resource mobility has had a positive effect upon world GDP.
	D)	International resource mobility has had such a small effect upon world GDP that it is not worth measuring.
	Ans: C Difficulty: Easy Section: Gains from Labor and Capital Flows Skill Descriptor: Fact-Based Topic: Gains from Foreign Direct Investment

137.

Suppose that an economy has 1,500 units of capital and 1,000 workers. This economy produces computers and shoes. Computer production requires 4 units of capital per worker and shirt production requires 1 unit of capital per worker.

A) Solve for the amount of labor and capital used in each industry.

If you answered Question 6 at the end of textbook Chapter 5, you know that:

(1) K_C + K_S= the total capital stock, and L_C + L_S= the total labor force; and

(2) K= 4 × L_C, and K_S= 1 × L_S.

B) Suppose that the number of workers increases to 1,250 due to immigration, keeping total capital fixed at 1,000. Solve for the distribution of labor and capital between the two sectors.

Ans:

A) Rewrite as:

(1) K_C + K_S = 1,500, and L_C + L_S = 1,000; and

K_C= 4 × L_C and K_S= 1 × L_Simplies 4L_C+ 1L_S= 1,500 and L_C= 1,000 – L_S = 4(1000 – L_S) + L_S= 1,500 or 4,000 – 1,500 = 3L_S and L_S= 833.33.

(2) K_C= 4 × L_C and K_S= 1 × L_Simplies 4L_C= 1,000 – 833.33 = 167.67; K_C= 4 × 167.33 = 667.67 and K_S= 1 × 833.33.

B) The shoe sector’s labor force will rise to 1,167.67; the computer sector’s labor force falls to is 67.67.

Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Effects of Immigration in the Short Run

138.	Does the European Union allow migration among its member countries?
	Ans:	It does, although migration from Bulgaria and Romania began to be allowed in January 2014, and some countries (e.g., the UK) are considering restrictions on their immigrants. Other EU countries are placing restrictions on movements of immigrants from non-member counties in Africa to other EU countries.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Immigration to the United States and Europe Today

139.

What three principles does Giovanni Peri describe as important to the on-going debate on immigration to the United States?

Ans:

Principle One: Simplification of the many disconnected provisions of the visa system such as the 7% limit on permanent permits to any one nationality. A more rational approach would be to establish simple targets and rules for various skill groups.

Principle Two: Allow supply and demand to determine the number of temporary work visas and auction permits to employers. Auction prices would signal changes in immigrant demand and allow the government to adjust the number of permits issued.

Principle Three: Expand the H-1B visa system to allow more skilled workers to immigrate to the United States.

Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Immigration to the United States and Europe Today

140.	In which U.S. educational categories were foreign-born workers MOST highly concentrated in 2010?
	Ans:	Foreign-born workers were most highly concentrated among U.S. workers with less than a high school diploma and among U.S. workers with graduate degrees. The share of U.S. workers with less than a high school diploma, with a masters or other professional degree, with a Ph.D. degree, and with a Ph.D. degree in science or engineering was about 40%, 15%, nearly 30%, and nearly 40%, respectively, in 2010.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Immigration to the United States and Europe Today

141.	What percentage limit per nationality does the U.S. government impose for granting permanent visas?
	Ans:	7%
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Immigration to the United States and Europe Today

142.	Discuss the evidence on the impact of immigration on wages of all U.S. workers (including foreign-born) by educational level.
	Ans:	The short-run effects are largest for workers with less than 12 years of education (–7.8%) and for college graduates (–4.7%), with an overall average of all U.S workers of –3.0%. The long run effects are again largest for those with less than 12 years of education (–4.7%) and for college graduates (–1.7%), with an overall average of 0.1%. The long-run effects are larger for foreign-born workers in all educational categories: –4.9% for foreign-born workers with less than 12 years of education versus +0.3% for U.S. born workers with the same years of education, –7.0% versus 0.4% for workers with a high school diploma, –4.0% versus 0.9% for workers with some college, and –8.1% versus 0.5% for workers with a college degree.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Fact-Based Topic: Immigration to the United States and Europe Today

143.	Evidence in the text indicates that the long-run effects if immigration on overall U.S. wages remain nearly constant (0.1%), which is consistent with the long-run (Heckscher-Ohlin) model. However, there are differing effects across workers’ educational levels. What are these differing effects and why might they occur?
	Ans:	The long-run effects are –4.7% for workers with less than 12 years of education, 0.9% for high school graduates, 2.2% for workers with some college, and –1.7% for college graduates. Differences such as these may arise because it is possible for wages in different categories to change, while the average remains more or less constant, because the supply of foreign-born workers is larger among lower (less than 12 years) and more educated (college graduates), and because foreign-born and U.S.-born workers with the same educational category may be imperfect substitutes for each other.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Immigration to the United States and Europe Today

144.	In the short run, immigration lowers wages in both sectors because of what feature of production?
	Ans:	In the short run, immigration lowers wages in both sectors due to diminishing marginal productivity created by the fixed amount of the specific factors.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Other Effects of Immigration in the Short Run

145.	Why do owners of capital and land usually support the reduction of restrictions on immigration?
	Ans:	In the short run, immigration decreases capital-labor and land-labor ratios, which increases the marginal productivities of capital and land and, ceteris paribus, returns to capital and land.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Other Effects of Immigration in the Short Run

146.	Would you expect the owners of capital and land to support lower barriers on immigration more than lower barriers on imports?
	Ans:	They would support lower barriers to immigration, since returns to capital and land should increase as a result of lower capital-labor and land-labor ratios. Lower barriers on imports, however, will increase competition for domestic import-competing production.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Other Effects of Immigration in the Short Run

147.

Immigrants were recruited to work in the iron and copper mines of Michigan’s Upper Peninsula from the mid-1800s to the early 1900s. The first immigrants were recruited from the tin mining area of Cornwall (United Kingdom); later immigrants came from Finland, Sweden, northern Italy, and the Balkan countries.

A) Give some plausible reasons why the later immigrants originated in Scandinavia and other parts of Europe.

B) Give some reasons why Cornish immigrants tended to be paid more than later immigrants.

C) Immigration more or less ceased around 1920. One reason was the introduction of one-man drilling techniques; another was the end of World War I. Why did these two events cause cessation of immigration to Michigan’s Upper Peninsula.

Ans:

A) Later immigrants came from European countries with severe climates similar to those prevailing in Michigan’s Upper Peninsula; later immigrants often came to the United States because they were displaced from family agriculture land because of land tenure laws and customs. Some later immigrants originated in countries with political difficulties. Later immigrants tended to be unskilled workers subject to low incomes in their home countries.

B) The first wave of immigrants was comprised mainly of skilled miners who required a higher premium to induce them to immigrate. Over time, they became mine supervisors of the unskilled immigrants who followed.

C) One-man drilling techniques displaced sizable numbers of workers. Previously, drilling required two persons: one to hold the drill and the other to use a sledgehammer to drive the drill into ore formations. The end of World War I reduced the demand for copper used in armaments.

Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Effects of Immigration in the Long Run

148.

Large numbers of Pakistani, Indian, Bangladeshi, and Philippine labor are working (mainly in low skilled jobs) in Arabian Peninsula countries (e.g., Qatar, Saudi Arabia, United Arab Emirates). Suppose that you are an Indian worker who could earn $1,000 annually at home and $3,000 in Saudi Arabia.

A) Compare the productivity of this worker at home and in Saudi Arabia.

B) Why might these productivities differ?

C) Often, a broker arranges visas for foreigners to work in Saudi Arabia. What is the maximum amount that an Indian worker might be willing to pay a broker to arrange a work visa for Saudi Arabia?

Ans:

A) The productivity of the worker is $1,000 in India and $3,000 in Saudi Arabia.

B) There must be more of other resources (capital and land) with which the worker is employed in order to increase his or her productivity to $3,000 in Saudi Arabia.

C) The worker should be willing to pay up to $2,000 for the broker to arrange a visa. In practice, there are other costs associated with migration (e.g., travel to and from India and non-pecuniary costs associated with working in the Saudi environment) so the actual payment to the broker may be much less than $2,000.

Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Effects of Immigration in the Long Run

149.	In spring 2010, an explosion on an offshore oil-drilling rig caused 11 deaths and a major oil spill in the Gulf of Mexico. Shortly thereafter, the U.S. government declared a moratorium on oil drilling in U.S. territorial waters in the Gulf of Mexico and a re-examination of offshore drilling regulations. What were the expected short- and long-run effects of these actions on labor in Gulf coastal states?
	Ans:	In the short run, there would be unemployment of workers directly employed in oil drilling and production as well as workers indirectly employed by firms supplying the oil industry, accompanied by a short-run downward pressure on wages. In the long run, the effects would depend upon the length of the moratorium and changes in offshore drilling regulations. There would likely to be migration of labor from the Gulf states to other parts of the United States if these events curtail Gulf coast offshore oil drilling.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Rybczynski Theorem

150.	When Irish immigrants first came to the United States, they were widely discriminated against. A century after a wave of Irish immigration, however, Americans generally look favorably on Irish heritage. How can our models explain this?
	Ans:	In the short run, these immigrants lowered wages. In the long run, this effect dissipated. As a result, the discrimination against them did, as well.
	Difficulty: Moderate Section: Movement of Labor Between Countries: Migration Skill Descriptor: Critical Thinking Topic: Rybczynski Theorem

151.	According to the Rybczynski theorem, why will labor immigration lead to a long-run increase in output in a labor-intensive industry and a decrease in the output of a capital-intensive industry?
	Ans:	Immigration will cause an asymmetric shift in a country’s PPF favoring the labor-intensive good (as shown in textbook Figure 5-9). With unchanged prices, this shift causes increased production of the labor-intensive good and decreased production of the capital-intensive good. Alternatively, suppose that the labor-intensive good absorbs all the immigrant labor. Its capital-labor (labor-capital) ratio falls, which increases its returns to capital and attracts capital from the capital-intensive sector. This movement continues until capital–labor ratios are the same between sectors, which equalizes returns to capital and labor between sectors.
	Difficulty: Difficult Section: Movement of Labor Between Countries: Migration Skill Descriptor: Analytical Thinking Topic: Rybczynski Theorem

152.

Assume two nations, two products, and two factors of production, labor and capital. Compare the situation of FDI in the short run and the long run regarding wages, returns to capital, industry output, and prices of goods.

Ans:

In the short run, we use the specific-factors model to analyze the inflow of capital, which assumes that labor can move but capital is fixed. As new capital enters, the K/L ratio in the capital-intensive industry rises, the marginal product of labor in the capital-intensive industry rises, and wages of labor rise, while the marginal product of capital declines. The result is an expansion in capital-intensive production, a decline in the price of capital-intensive goods, a movement of labor into the capital-intensive industry (which raises the MP in the labor-intensive industry as well), a decline in production in labor-intensive industries, and a decline in the return to capital.

In the long run, when capital can move as well, there is a further long-run adjustment; as returns fall in the capital-intensive industry, existing capital moves from the capital-intensive industry to the labor-intensive industry, raising the MP of labor and causing a reverse flow of labor back to the labor-intensive industry. At the long-run equilibrium, the MPs, the K/L ratios, and returns to both factors are unchanged, but production in capital-intensive industries rises while production in labor-intensive industries declines. The relative price of capital-intensive goods declines.

Difficulty: Moderate Section: Movement of Capital Between Countries: Foreign Direct Investment Skill Descriptor: Analytical Thinking Topic: FDI in the Long Run

153.	In 2010, were remittances from emigrant labor from developing countries more or less important than official foreign aid to these countries?
	Ans:	For nearly all developing countries where emigrant labor was significant, remittances were generally much larger (as much as 19 times larger for India) than official foreign aid.
	Difficulty: Moderate Section: Gains from Labor and Capital Flows Skill Descriptor: Fact-Based Topic: Immigrants and Their Remittances

1.	Tracking and measuring international flows of goods and assets are based on principles of:
	A)	economics.
	B)	statistics.
	C)	historical precedents.
	D)	accounting.
	Ans: D Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: Measuring Macroeconomic Activity: An Overview

2.	Summaries of international flows of goods and assets are recorded in a nation’s:
	A)	national income and product accounts.
	B)	balances with the IMF.
	C)	balance of payments accounts.
	D)	balance on international indebtedness.
	Ans: C Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: Measuring Macroeconomic Activity: An Overview

3.	Gross national expenditure in a closed economy is defined as:
	A)	government spending net of taxes.
	B)	personal consumption spending, government spending, and investment spending.
	C)	personal consumption spending, government spending, investment spending, and spending on exports.
	D)	production of consumer goods, government services, and capital goods.
	Ans: B Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

4.	In national accounts data, which is the largest share of GNEs?
	A)	Consumption
	B)	Investment
	C)	government consumption
	D)	All are roughly equal in size.
	Ans: A Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Fact-Based Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

5.	In a closed economy, income generated from production is equal to:
	A)	GNE.
	B)	GDP.
	C)	GNI.
	D)	GNE, GDP, and GNI.
	Ans: D Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

6.	In a closed economy in which no international economic activity occurs, which of the following is NOT true?
	A)	Production in the nation must equal total demand (spending on final goods and services).
	B)	Total spending is equal to the sum of consumer spending, business investment, and government purchases.
	C)	Value added in the economy is equal to income paid to factors of production.
	D)	Value added in the economy is equal to the sum of consumer spending, business investment, and government purchases.
	Ans: D Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Concept-Based Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

7.	The circular flow concept of a closed economy helps to explain why:
	A)	firms are able to earn profits.
	B)	GDP, GNI, and GNE are equal.
	C)	unemployment is not a problem in a closed economy—only in an open economy.
	D)	nominal GDP is always higher than real GDP.
	Ans: B Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Concept-Based Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

8.	The personal consumption expenditure includes all of the following, EXCEPT spending by private households on:
	A)	final goods and services.
	B)	nondurable goods.
	C)	durable goods.
	D)	capital stock.
	Ans: D Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

9.	Government consumption expenditure includes the following, EXCEPT government spending on:
	A)	national defense.
	B)	public works.
	C)	Social Security.
	D)	civil services.
	Ans: C Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

10.	Income paid to factors is called:
	A)	national income.
	B)	value added.
	C)	net exports.
	D)	the current account.
	Ans: A Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

11.	Which of the following factors is NOT part of the current account of a country?
	A)	exports
	B)	imports
	C)	unilateral transfers
	D)	Social Security contributions
	Ans: D Difficulty: Medium Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in a Closed Economy: Introducing the National Income and Product Accounts

12.	When calculating GDP in an open economy, we adjust GNE by:
	A)	subtracting exports and adding imports.
	B)	subtracting investment from foreigners and adding foreign investment by residents.
	C)	subtracting imports and adding exports.
	D)	subtracting depreciation from GDP.
	Ans: C Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

13.	In the flow diagram representing an open economy, which of the following is TRUE?
	A)	GNE plus the trade balance (TB) are equal to GDP (total domestic production).
	B)	GNE are always less than GDP.
	C)	GDP rises as GNI rises.
	D)	GNE plus imports are equal to GDP.
	Ans: A Difficulty: Medium Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Concept-Based Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

14.	When calculating gross national income in an open economy, we adjust gross national expenditure by:
	A)	subtracting exports and adding back imports.
	B)	adding in net income earned from foreign sources plus net unilateral transfers from abroad.
	C)	subtracting depreciation, payroll taxes, and indirect business taxes, while adding in subsidies.
	D)	taking out net factor income from abroad and subtracting net unilateral transfers.
	Ans: B Difficulty: Medium Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

15.	The current account of the balance of payments is calculated as:
	A)	the sum of imports, exports, and transfers.
	B)	the sum of national income and national expenditure.
	C)	the sum of the trade balance, net factor income from abroad, and net unilateral transfers.
	D)	the difference between GDP and GNE.
	Ans: C Difficulty: Medium Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

16.	Net factor income from abroad is defined as:
	A)	the difference between foreign GDP and U.S. GDP.
	B)	the difference between what foreign firms pay U.S. factors of production hired to produce foreign GDP and what U.S. firms pay foreign factors of production hired to produce U.S. GDP.
	C)	taxes paid on income earned outside the country.
	D)	the difference between foreign national income and U.S. national income.
	Ans: B Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

17.	The term net unilateral transfers refers to:
	A)	income earned abroad by a nation’s own workers minus income paid to foreign non-resident workers.
	B)	gifts, charitable contributions, and foreign aid.
	C)	gifts, charitable contributions, and aid to foreign residents minus the same types of transfers to residents of the home nation.
	D)	government subsidies to home corporations minus the same government subsidies to international corporations.
	Ans: C Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

18.	The disposable income of a nation is known as gross national disposable income, which can be defined as:
	A)	income earned from production plus net factor income from abroad plus net unilateral transfers.
	B)	income not saved and not spent.
	C)	government transfers to residents plus foreign transfers to residents.
	D)	income that is more than necessary to sustain life.
	Ans: A Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

19.	In an open economy, GNI is equal to:
	A)	exports of goods and services plus imports of goods and services.
	B)	GDP.
	C)	GDP, minus factor services imports, plus factor services exports, minus net unilateral transfers.
	D)	GDP plus international transfers and gifts to foreigners.
	Ans: C Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

20.	Asset exports occur when domestic entities:
	A)	save internationally by purchasing foreign assets.
	B)	borrow internationally by selling assets to foreigners.
	C)	increase savings and decrease spending both domestically and internationally.
	D)	decrease savings and increase spending on foreign goods.
	Ans: B Difficulty: Medium Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Concept-Based Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

21.	The difference (balance) between asset exports and asset imports is called:
	A)	the current account.
	B)	the balance of debt.
	C)	capital remainder flows.
	D)	the balance on the financial account.
	Ans: D Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Definitional Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

22.	The total economic activity in a nation is an important measure. There are three approaches that economists use to measure key indicators. Which is a method that economists do NOT use to measure economic activity?
	A)	the accounting approach, using the idea that total private sales have to equal total private production
	B)	the income approach measuring income received by factors of production
	C)	the expenditure approach, using the idea that the total economic activity is equal to the combined purchases of the various sectors
	D)	the product approach, which measures GDP from a production standpoint
	Ans: A Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: Three Approaches to Measuring Economic Activity

23.	An advantage to calculating national income from value added is that it avoids:
	A)	the net present value.
	B)	price changes.
	C)	double counting.
	D)	measurement error.
	Ans: C Difficulty: Easy Section: National Accounts: Product, Expenditure, and Income Skill Descriptor: Concept-Based Topic: Three Approaches to Measuring Economic Activity

24.	How do we handle intermediate goods and services when converting from GNE to GDP?
	A)	Intermediate goods are already counted in GNE, so they do not have to be added in to GDP.
	B)	Imported intermediate goods are counted in GNE, so they must be subtracted from GDP to avoid double counting.
	C)	Exported intermediate goods are counted in GNE, so they must be subtracted from GDP to avoid double counting.
	D)	We add (to GNE) the value of imported goods and services and subtract the value of exported goods and services to get GDP.
	Ans: B Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GNE to GDP: Accounting for Trade in Goods and Services

Use the following to answer questions 25-27:

Table: Hypothetical U.S. National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	8,000
Investment (gross private domestic investment)	1,300
Government consumption (government expenditures)	2,100
Exports	900
Imports	1,750
NFIA	+45
Net unilateral transfers	–20

25.	(Table: Hypothetical U.S. National Income and Product Accounts Data) Using the table, the GNE is:
	A)	$9,300.
	B)	$3,400.
	C)	$10,550.
	D)	$11,400.
	Ans: D Difficulty: Medium Section: income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

26.	(Table: Hypothetical U.S. National Income and Product Accounts Data) Using the table, the trade balance for the economy provided is:
	A)	$1,750.
	B)	–$900.
	C)	$2,650.
	D)	–$850.
	Ans: D Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

27.	(Table: Hypothetical U.S. National Income and Product Accounts Data) The GDP for the economy provided is:
	A)	$11,400.
	B)	$10,575.
	C)	$10,550.
	D)	$10,595.
	Ans: C Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

Use the following to answer questions 28-32:

Table: Hypothetical Canadian National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	400
Investment (gross private domestic investment)	150
Government consumption (government expenditures)	80
Exports	210
Imports	60
Foreign income payments to domestic factors	20
Domestic income payments to foreign factors	10
Net unilateral transfers	5

28.	(Table: Hypothetical Canadian National Income and Product Accounts Data) Using the table, the GNE is:
	A)	$630.
	B)	$550.
	C)	$230.
	D)	$120.
	Ans: A Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

29.	(Table: Hypothetical Canadian National Income and Product Accounts Data) Using the table, the trade balance for the economy provided is:
	A)	–$60.
	B)	–$150.
	C)	$150.
	D)	$270.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

30.	(Table: Hypothetical Canadian National Income and Product Accounts Data) Canada is running a balance of:
	A)	trade surplus.
	B)	payments surplus.
	C)	trade deficit.
	D)	payments deficit.
	Ans: A Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

31.	(Table: Hypothetical Canadian National Income and Product Accounts Data) The GDP for the economy provided is:
	A)	$630.
	B)	$780.
	C)	$840.
	D)	$1,025.
	Ans: B Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

32.	(Table: Hypothetical Canadian National Income and Product Accounts Data) The GNI for the economy provided is:
	A)	$10.
	B)	$20.
	C)	$780.
	D)	$790.
	Ans: D Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

Use the following to answer questions 33-37:

Table: Hypothetical Irish National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	400
Investment (gross private domestic investment)	150
Government consumption (government expenditures)	80
Exports	210
Imports	60
Foreign income payments to domestic factors	20
Domestic income payments to foreign factors	10
Net unilateral transfers	5

33.	(Table: Hypothetical Irish National Income and Product Accounts Data) Using the table, the GNE is:
	A)	$900.
	B)	$520.
	C)	$630.
	D)	$1,800.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

34.	(Table: Hypothetical Irish National Income and Product Accounts Data) The trade balance for Ireland is:
	A)	–$100.
	B)	$0.
	C)	$60.
	D)	$150.
	Ans: D Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

35.	(Table: Hypothetical Irish National Income and Product Accounts Data) Ireland is running a balance of:
	A)	trade deficit.
	B)	payments surplus.
	C)	trade surplus.
	D)	payments deficit.
	Ans: C Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

36.	(Table: Hypothetical Irish National Income and Product Accounts Data) The GDP for Ireland is:
	A)	$150.
	B)	$630.
	C)	$780.
	D)	$1,500.
	Ans: C Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

37.	(Table: Hypothetical Irish National Income and Product Accounts Data) The GNDI for Ireland is:
	A)	$780.
	B)	$785.
	C)	$790.
	D)	$795.
	Ans: D Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNE to GDP: Accounting for Trade in Goods and Services

38.	Which of the following statements about the relationships between the domestic and international economy is TRUE?
	A)	Domestic sales of goods and services to a foreign nation are always equal to domestic purchases of goods and services from the same nation.
	B)	Total goods and services produced and sold domestically by domestic firms plus imports are equal to the total domestic production plus exports.
	C)	GDP = GNE + (exports – imports).
	D)	Intermediate goods and services purchased by domestic firms from foreign firms are equal to international sales of intermediate goods to foreign firms.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GNE to GDP: Accounting for Trade in Goods and Services

39.	Because of vertically specialized production processes, the volume of intermediate goods trade has risen. In 2010, it was approximately ____ of total world trade.
	A)	15%
	B)	25%
	C)	40%
	D)	60%
	Ans: D Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: From GNE to GDP: Accounting for Trade in Goods and Services

40.	NFIA is the same thing as:
	A)	world real GDP.
	B)	sales of factor services to foreigners minus purchases of factor services from foreign nations.
	C)	income paid to domestic workers.
	D)	exactly 20% of domestic GDP.
	Ans: B Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: From GDP to GNI: Accounting for Trade in Factor Services

41.	A firm in one nation may purchase factor services from another nation. Payments for these services to the factors of production are called:
	A)	service income payments.
	B)	net income.
	C)	gross income.
	D)	wage and salary income.
	Ans: A Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GDP to GNI: Accounting for Trade in Factor Services

42.	The relationship between GNI and GDP is:
	A)	GNI – GDP = factor income receipts from foreign sources – payments of income to foreign factors (by domestic firms).
	B)	GDP is equal to GNI within the nation.
	C)	GDP is always less than GNI because of domestic transfer payments.
	D)	GNI includes transfers and gifts from the rest of the world; GDP does not.
	Ans: A Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GDP to GNI: Accounting for Trade in Factor Services

43.	The difference between gross national income and gross domestic product is:
	A)	total indirect employee costs such as health or retirement insurance.
	B)	income earned in addition to salaries, commissions, and bonuses.
	C)	income earned abroad by residents minus income paid to foreign factors of production.
	D)	income not subject to taxation such as capital gains, illegal earnings, or casual earnings.
	Ans: C Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GDP to GNI: Accounting for Trade in Factor Services

44.	GDP is measured by:
	A)	examining how much is spent on demand for final goods and services.
	B)	tracking the amount of income received by different domestic entities.
	C)	the net value of all goods and services produced by the private sector.
	D)	the net value of all goods and services produced by the private sector, excluding the value of intermediate goods.
	Ans: D Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: From GDP to GNI: Accounting for Trade in Factor Services

Use the following to answer question 45:

Table: Hypothetical U.S. National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	1,200
Investment (gross private domestic investment)	700
Government consumption (government expenditures)	200
Exports	500
Imports	600
Foreign income payments to domestic factors	100
Domestic income payments to foreign factors	400
Net unilateral transfers	–10

45.	(Table: Hypothetical U.S. National Income and Product Accounts Data) The GNI for the economy provided is:
	A)	$1,900.
	B)	$1,700.
	C)	$2,300.
	D)	$3,300.
	Ans: B Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GDP to GNI: Accounting for Trade in Factor Services

46.	The example in the text about Ireland demonstrates that:
	A)	every nation has the power to export and grow its economy through receipt of foreign investment.
	B)	GNI should not be used to measure the income of domestic factors of production.
	C)	a nation’s GDP is not a good measure of income paid to domestic factors when payments to foreign factors are large.
	D)	countries should rely heavily on foreign investment to generate economic growth and increase their GDP.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GDP to GNI: Accounting for Trade in Factor Services

47.	The Irish example indicates that GDP per capita and GNI per capita:
	A)	are always equal.
	B)	are usually close to one another.
	C)	can be quite different.
	D)	are unrelated.
	Ans: C Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GDP to GNI: Accounting for Trade in Factor Services

48.	The difference between Irish GDP per capita and Irish GNI per capita was:
	A)	the result of poor accounting.
	B)	the result of a large trade deficit.
	C)	an outcome from FDI inflows.
	D)	essentially zero.
	Ans: C Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: From GDP to GNI: Accounting for Trade in Factor Services

49.	When measuring GNI in an open economy, one must recognize not only net transfer payments to factors of production but also:
	A)	net profit paid to corporations.
	B)	the increase in asset prices as a result of foreign investment.
	C)	income earned in the underground economy.
	D)	net unilateral transfers, which include official aid and private charitable gifts.
	Ans: D Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: From GNI to GNDI: Accounting for Transfers of Income

50.	GNDI is a superior measure of a nation’s welfare because it considers net foreign factor earnings and other sources of income available to the population. The GNDI identity equation is as follows:
	A)	Y = GNDI = consumer production + capital goods (business investment) + government + net exports.
	B)	Y = GNDI = GNI + NUT.
	C)	Y = GNDI = wages + profits + interest + rental income + net foreign factor income.
	D)	Y = GNDI = foreign aid + income from outsourcing + returns on foreign investment.
	Ans: B Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: From GNI to GNDI: Accounting for Transfers of Income

Use the following to answer questions 51-52:

Table: Hypothetical Canadian National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	8,000
Investment (gross private domestic investment)	1,300
Government consumption (government expenditures)	2,100
Exports	900
Imports	1,750
NFIA	+45
Net unilateral transfers	–20

51.	(Table: Hypothetical Canadian National Income and Product Accounts Data) According to the NUTs, economists would say that:
	A)	Canada has given away more foreign aid than it receives.
	B)	Canadians abroad have sent a lot of income home.
	C)	Mexicans in Canada have sent a lot of income home.
	D)	Canada has a balance of payments deficit.
	Ans: B Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNI to GNDI: Accounting for Transfers of Income

52.	(Table: Hypothetical Canadian National Income and Product Accounts Data) The GNDI for the economy provided is:
	A)	$11,825.
	B)	$10,575.
	C)	$8,625.
	D)	$8,600.
	Ans: B Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: From GNI to GNDI: Accounting for Transfers of Income

53.	Net transfers of income from foreign sources play a ____ role in the donor countries, but often play a _____ role in the economies of the recipient nations.
	A)	major; minor
	B)	neutral; significant
	C)	minor; major
	D)	significant; neutral
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: From GNI to GNDI: Accounting for Transfers of Income

54.	According to the article on the generosity of wealthy nations in helping low-income nations, the United States:
	A)	gave the least in absolute terms, although it had pledged to give the most.
	B)	was the largest single-nation donor, although in percentage of aid based on economic size, it was below most other developed nations.
	C)	was the only nation that could be counted on to help tsunami victims or provide free drugs for AIDS patients in Africa.
	D)	has dramatically raised the level of foreign aid during the past 20 years.
	Ans: B Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: What the National Economic Aggregates Tell Us

55.	The assistance the United States provides to developing countries is through:
	A)	cash transfers.
	B)	debt forgiveness.
	C)	defense spending.
	D)	cash transfers, debt forgiveness, and defense spending.
	Ans: D Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: What the National Economic Aggregates Tell Us

Use the following to answer question 56:

Table: Hypothetical Canadian National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	400
Investment (gross private domestic investment)	150
Government consumption (government expenditures)	80
Exports	210
Imports	60
Foreign income payments to domestic factors	20
Domestic income payments to foreign factors	10
Net unilateral transfers	5

56.	(Table: Hypothetical Canadian National Income and Product Accounts Data) What is the current account for Canada?
	A)	$165
	B)	$150
	C)	$15
	D)	$5
	Ans: A Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the National Economic Aggregates Tell Us

Use the following to answer question 57:

Table: Hypothetical Irish National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	1,200
Investment (gross private domestic investment)	700
Government consumption (government expenditures)	200
Exports	500
Imports	600
Foreign income payments to domestic factors	100
Domestic income payments to foreign factors	400
Net unilateral transfers	–10

57.	(Table: Hypothetical Irish National Income and Product Accounts Data) What is the current account for Ireland?
	A)	$310
	B)	$290
	C)	–$290
	D)	–$410
	Ans: D Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the National Economic Aggregates Tell Us

58.	When a closed economy is compared to an open economy, what situation exists?
	A)	Economic activity is directed entirely by the state in an open economy.
	B)	Exports and imports are monitored and controlled, so there is never a trade imbalance in a closed economy.
	C)	In a closed economy, because there are no exports or imports, no international transfers, and no service payments, GDP, GNE, GNI, and GNDI are all equal.
	D)	GDP is always higher than GNE in an open economy because some goods remain unsold into the next accounting period.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the National Economic Aggregates Tell Us

59.	When analyzing economic situations in an open economy instead of a closed economy, one must take into account:
	A)	only the production of final goods and services rather than intermediate goods or services.
	B)	the relationship between domestic investment and the nominal rate of interest.
	C)	the influence of international political relationships, which do not exist in a closed economy.
	D)	the fact that international transactions can create an imbalance in the current account, so that GDP is not necessarily equal to GNI or GNE.
	Ans: D Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: Understanding the Data for the National Economic Aggregates

60.	In the United States, during the period 1990 to 2009, the current account deficit greatly ____ because of a(n) ____ in the trade deficit, thus, GDP was lower than GNE.
	A)	increased; increase
	B)	decreased; decrease
	C)	increased; decrease
	D)	decreased; increase
	Ans: A Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: Understanding the Data for the National Economic Aggregates

61.	Whenever there is a deficit in the current account GNDI is:
	A)	equal to GNE.
	B)	greater than GNE.
	C)	less than GNE.
	D)	equal to GNE only if there is no domestic investment spending.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: Understanding the Data for the National Economic Aggregates

62.	The current account represents the difference between gross national disposable income and:
	A)	GDP.
	B)	GNP.
	C)	domestic investment spending.
	D)	GNE.
	Ans: D Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: What the Current Account Tells Us

63.	Net national saving is related to the balance on the current account in the following way:
	A)	domestic investment = net national saving = the balance on the current account – gross domestic product – gross national expenditure.
	B)	net national saving = domestic investment + the balance on the current account.
	C)	net national saving = domestic investment – the balance on the current account.
	D)	net national saving + the balance on the current account + domestic investment = gross domestic product.
	Ans: B Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: What the Current Account Tells Us

64.	Whenever the balance on the current account is negative, it indicates that:
	A)	the trade deficit is shrinking.
	B)	total spending (GNE) in the economy is greater than income and is financed by borrowing from abroad.
	C)	domestic investment cannot be carried out because of a shortage of savings.
	D)	domestic investment is decreasing.
	Ans: B Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the Current Account Tells Us

65.	For most countries, the savings trend over the past 30 years has been:
	A)	upward.
	B)	steady.
	C)	downward.
	D)	downward, but less than the decline in investments.
	Ans: C Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: What the Current Account Tells Us

66.	To fund private investment without borrowing from abroad, a nation may have access to:
	A)	private saving (Y – C).
	B)	government saving (G – T).
	C)	private saving (C – Y).
	D)	unilateral transfer outflows.
	Ans: A Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: What the Current Account Tells Us

67.	If investment exceeds national savings, then the current account:
	A)	must be negative.
	B)	must be zero.
	C)	must be positive.
	D)	Not enough information is provided to answer the question.
	Ans: A Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the Current Account Tells Us

68.	If investment exceeds private savings, then the current account:
	A)	must be negative.
	B)	must be zero.
	C)	must be positive.
	D)	Not enough information is provided to answer the question.
	Ans: D Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the Current Account Tells Us

69.	Government budget deficits and trade deficits tend to move:
	A)	independently from one another.
	B)	together.
	C)	in the opposite directions.
	D)	independently from one another, except in recessions.
	Ans: B Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: What the Current Account Tells Us

Use the following to answer question 70:

Table: Hypothetical Irish National Income and Product Accounts Data

Category	Billions of dollars
Consumption (personal consumption expenditures)	1,200
Investment (gross private domestic investment)	700
Government consumption (government expenditures)	200
Exports	500
Imports	600
Foreign income payments to domestic factors	100
Domestic income payments to foreign factors	400
Net unilateral transfers	–10

70.	(Table: Hypothetical Irish National Income and Product Accounts Data) Are Ireland’s savings greater or smaller than its investment?
	A)	greater
	B)	smaller
	C)	the same size
	D)	Not enough information is provided to answer the question.
	Ans: B Difficulty: Difficult Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the Current Account Tells Us

71.	If we add the current account balances for every nation, the overall balance will equal:
	A)	the size of world GDP.
	B)	spending minus savings.
	C)	zero.
	D)	the value added in the manufacturing sectors of each nation.
	Ans: C Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: What the Current Account Tells Us

72.	The trend of increasingly older populations in industrialized nations probably has contributed to:
	A)	the “demographic burden” whereby there is decreased total saving.
	B)	a spike in spending on leisure activities.
	C)	an increase in technology and GDP.
	D)	an increase in tax collections.
	Ans: A Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: Global Imbalances

73.	The term private saving is defined as:
	A)	government saving minus taxes.
	B)	after-tax disposable income minus consumption spending.
	C)	the difference between tax revenue and government purchases.
	D)	the inflow of investment funds from abroad.
	Ans: B Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: Global Imbalances

74.	The term government saving is defined as:
	A)	government saving minus taxes.
	B)	after-tax disposable income minus consumption spending.
	C)	the difference between tax revenue and government purchases.
	D)	the inflow of investment funds from abroad.
	Ans: C Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Definitional Topic: Global Imbalances

75.	Private savings deficits plus government budget deficits contribute to higher current account deficits. Some economists refer to the Ricardian equivalence theory to assert that:
	A)	the public will offset its future tax liability to some degree by increasing saving.
	B)	the public abhors private and public debt and will demand an end to deficits.
	C)	savings will increase as the population ages, since older people save more.
	D)	the current account deficit is caused by trade and is not influenced by deficit spending.
	Ans: A Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: Global Imbalances

76.	Private savings deficits plus government budget deficits contribute to higher current account deficits. Some economists refer to the ______ during the 1990s to assert that government deficits are not the major cause of current account deficits.
	A)	savings boom
	B)	investment boom
	C)	baby boom
	D)	housing boom
	Ans: B Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Fact-Based Topic: Global Imbalances

77.	The balance on the financial account summarizes transactions in:
	A)	real estate, stocks, bonds, investment, and any financial asset.
	B)	goods, services, and bartered items.
	C)	accounting services provided by the big-eight accounting firms.
	D)	government transfers of currency.
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Accounting for Asset Transactions; The Financial Account

78.	In addition to summarizing international flows of goods and services, factor inputs, and transfers, ____ includes financial flows such as deposits, purchases of stocks, bonds investment in plant and equipment, and real estate.
	A)	the financial account
	B)	balance of payments accounting
	C)	the current account
	D)	the capital account
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Accounting for Asset Transactions: The Capital Account

79.	The financial account records international transactions involving:
	A)	high-value items such as luxury autos, fine art, and jewelry.
	B)	financial assets and “real” assets, including property and structures.
	C)	corporate assets such as equipment, machinery, and other forms of capital.
	D)	goods and services sold on credit.
	Ans: B Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: Accounting for Asset Transactions: The Capital Account

80.	A deficit in the financial account means the nation has:
	A)	imported more assets than it exported.
	B)	exported more assets than it imported.
	C)	saved more than it invested.
	D)	produced more than it consumed.
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Accounting for Asset Transactions: The Capital Account

81.	The capital account is now used mainly for:
	A)	errors and omissions.
	B)	recording of deeds and trusts.
	C)	investment flows that result in the purchase of new capital.
	D)	debt forgiveness, confiscation of assets, and nonfinancial assets such as copyrights and franchises.
	Ans: D Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: Accounting for Asset Transactions: The Capital Account

82.	Developing nations may have a rather large capital account surplus compared to developed nations because of:
	A)	excessive borrowing.
	B)	low GDP per capita.
	C)	rapid expansion of the economy.
	D)	non-market debt forgiveness.
	Ans: D Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Fact-Based Topic: Accounting for Asset Transactions: The Capital Account

83.	When a national entity invests abroad, economists call it a(n):
	A)	external asset.
	B)	external liability.
	C)	trade deficit.
	D)	financial surplus.
	Ans: A Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: Accounting for Home and Foreign Assets

84.	The balance on the financial account of the balance of payments does NOT equal:
	A)	external assets + external liabilities.
	B)	(exports of home assets – imports of home assets) + (exports of foreign assets – imports of foreign assets).
	C)	the net additions to external liabilities – the additions to external assets.
	D)	exports of home assets + exports of foreign assets.
	Ans: D Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Accounting for Home and Foreign Assets

85.	Which of the following would cause a financial account (FA) surplus?
	A)	the sale of heavy trucks used in construction by a domestic seller to a foreign buyer
	B)	the purchase of stock in a U.S. corporation by a U.S. buyer
	C)	the purchase of stock in a U.S. corporation by a foreign buyer
	D)	the sale of stock in a U.S. corporation held by a foreign owner to a domestic buyer
	Ans: C Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: Accounting for Home and Foreign Assets

86.	When a domestic investor buys a foreign asset, the financial account:
	A)	rises.
	B)	stays the same.
	C)	falls.
	D)	Not enough information is provided to answer the question.
	Ans: C Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: Accounting for Home and Foreign Assets

87.	When a domestic investor sells a foreign asset to a foreigner, the financial account:
	A)	rises.
	B)	stays the same.
	C)	falls.
	D)	Not enough information is provided to answer the question.
	Ans: A Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: Accounting for Home and Foreign Assets

88.	When a domestic investor sells a domestic asset to a foreigner, the financial account:
	A)	rises.
	B)	stays the same.
	C)	falls.
	D)	Not enough information is provided to answer the question.
	Ans: A Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: Accounting for Home and Foreign Assets

89.	When a domestic investor buys a domestic asset from another domestic investor, the financial account:
	A)	rises.
	B)	stays the same.
	C)	falls.
	D)	Not enough information is provided to answer the question.
	Ans: B Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: Accounting for Home and Foreign Assets

90.	Gross national disposable income represents the gross national expenditure plus net foreign expenditure. To calculate total resources available in the economy for expenditure purposes, we must add:
	A)	depreciation.
	B)	net foreign factor income.
	C)	net income from asset trades (FA + KA).
	D)	net income from asset trades and net foreign factor income.
	Ans: C Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

91.	The balance on the current account equals the negative of the balance on the financial account, plus:
	A)	the trade balance.
	B)	net factor income from abroad.
	C)	net unilateral transfers.
	D)	the negative of the balance on the capital account.
	Ans: D Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

92.	When calculating the balance of payments, credit (or [+] entries) are made, EXCEPT whenever which of the following occurs?
	A)	a domestic firm signs a contract to buy half of a foreign company headquartered overseas
	B)	there is a trade surplus.
	C)	a domestic firm sells bonds to a foreign firm.
	D)	other nations come to the aid of starving residents by gifts of cash, food, and medicine.
	Ans: A Difficulty: Medium Section: Balance of Payment Accounts Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

93.	A transaction that results in an increase (+) in its account is known as a(n):
	A)	BOP debit.
	B)	capital flow.
	C)	BOP credit.
	D)	asset accretion.
	Ans: C Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Definitional Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

94.	A transaction that results in a decrease (–) in its account is known as a(n):
	A)	BOP debit.
	B)	capital flow.
	C)	BOP credit.
	D)	asset accretion.
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Definitional Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

95.	Double-entry accounting dictates that:
	A)	transactions be entered twice into the same account and then reversed.
	B)	transactions are categorized into two offsetting accounts that reflect the two sides of every transaction.
	C)	for transactions that are missed, we compensate by doubling at least one other entry.
	D)	balances be double-checked by another employee and an auditor.
	Ans: B Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

96.	Whenever there is an outflow of funds from any of the balance of payments (BOP) accounts, it is recorded as a ____, and called _____.
	A)	minus; a unilateral transfer
	B)	minus; a BOP debit
	C)	plus; a BOP credit
	D)	plus; a current account surplus
	Ans: B Difficulty: Easy Section: Balance of Payment Accounts Skill Descriptor: Concept-Based Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

97.	The balance of payments for any nation will always:
	A)	be in deficit because nations can spend more than they produce.
	B)	be in surplus because overall every nation has some wealth.
	C)	balance to zero because with a double-entry accounting system any transaction always generates an equal transaction with the opposite sign.
	D)	be unbalanced because at any point in time money has to be collected or goods could be in transit.
	Ans: C Difficulty: Easy Section: Balance of Payment Accounts Skill Descriptor: Concept-Based Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

98.	If George purchases shoes from a Japanese firm for $100, and pays for them by borrowing $100 on his Japanese credit card, the two accounts that are affected are:
	A)	imports of goods with a minus (debit) and exports of goods with a plus (credit).
	B)	imports of goods with a minus (debit) and exports of financial assets with a plus (credit).
	C)	exports of goods with a minus (debit) and imports of financial assets with a plus (credit).
	D)	exports of goods with a plus (credit) and imports of financial assets with a minus (debit).
	Ans: B Difficulty: Medium Section: Balance of Payment Accounts Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

99.	Assuming all transactions are recorded, if the United States has an overall deficit (–) in its current account, what is the implication for the balances of the other accounts (capital and financial)?
	A)	Added (FA + KA), they must be in surplus (+) by exactly the same amount.
	B)	Their difference (FA – KA) is equal to the deficit (–) in the current account.
	C)	Added (FA + KA), they will be in deficit by exactly the same amount.
	D)	Their difference (FA – KA) must be equal to zero.
	Ans: A Difficulty: Medium Section: Balance of Payment Accounts Skill Descriptor: Concept-Based Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

100.	Suppose that an American buys a car from Germany with cash. For the United States, this counts as a:
	A)	current account credit, financial account debit.
	B)	current account debit, financial account credit.
	C)	current account debit, capital account credit.
	D)	current account credit, financial account credit.
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

101.	Suppose that an Austrian buys a car from Germany with cash. For Germany, this counts as a:
	A)	current account credit, financial account debit.
	B)	current account debit, financial account credit.
	C)	current account debit, capital account credit.
	D)	current account credit, financial account credit
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

102.	Suppose that a German trades a mug of beer for a glass of wine from a Frenchman. For France, this counts as a:
	A)	current account credit, current account debit.
	B)	financial account debit, financial account credit.
	C)	capital account debit, capital account credit.
	D)	financial account debit, current account debit.
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

103.	Suppose that a Japanese investor buys a Korean stock with cash. For Korea, this counts as a:
	A)	current account credit, current account debit.
	B)	financial account debit, financial account credit.
	C)	capital account debit, capital account credit.
	D)	financial account debit, current account debit.
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

104.	If you get cash for your birthday, you have experienced a:
	A)	current account surplus.
	B)	capital account surplus.
	C)	financial account surplus.
	D)	financial account and capital account surplus.
	Ans: C Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

105.	Barter shows up:
	A)	only in current account transactions.
	B)	only in financial account transactions.
	C)	only in capital account transactions.
	D)	in both current account and financial account transactions.
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

106.	The three balances that determine the current account balance are:
	A)	the external balance, the internal balance, and the global balance.
	B)	the trade balance, the balance on income from factor services, and the balance on net unilateral transfers.
	C)	the credit balance, the debit balance, and the balance of external indebtedness.
	D)	the balance on investment, the balance on asset transfers, and the balance on forgiveness of debt.
	Ans: B Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: Understanding the Data for the Balance of Payments Account

107.	By the rules of double-entry accounting applied to international transactions, which of the following statements is NOT true?
	A)	Every transfer of goods internationally must be paid for by an opposite transfer of goods, services, or unilateral transfers, or a transfer of assets.
	B)	Every debit transaction must be offset somewhere in the accounts by an equal credit transaction.
	C)	Deficits in any accounts are matched exactly by surpluses in an account at a parallel level.
	D)	Every debit transaction must be offset by a transfer of assets.
	Ans: D Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

108.	A nation that has a surplus in its current account:
	A)	also has a surplus in both the financial and capital accounts.
	B)	must have exported home assets (borrowed from abroad) or reduced its holding of foreign assets.
	C)	must have imported foreign assets (lent or invested abroad) or decreased the quantity of home assets held by foreigners (paid back loans or deposits).
	D)	must have paid back loans or deposits.
	Ans: C Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

109.	During the period in which a nation has a current account surplus, it is a net ____, and whenever it has a current account deficit, it is a net ____.
	A)	supplier; user
	B)	lender; borrower
	C)	borrower; lender
	D)	debtor; creditor
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

110.	In the financial account, when there is a current account surplus, there must be a(n) _____ in either the capital or the financial account balance.
	A)	deficit (outflow of funds)
	B)	surplus (inflow of funds)
	C)	balance (no net flow)
	D)	equal change (no net flow)
	Ans: A Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

111.	The balance on the financial account consists of:
	A)	the inverse of the balance on the current account.
	B)	the difference between external wealth and internal wealth.
	C)	the change in external liabilities minus the change in external assets.
	D)	the change in external wealth plus the change in internal wealth.
	Ans: C Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: Understanding the Data for the Balance of Payments Account

112.	The balance on intervention and other government-initiated asset trades is recorded in the:
	A)	non-reserve financial account.
	B)	reserve financial account.
	C)	U.S. Treasury international reserve account.
	D)	official settlements balance.
	Ans: D Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Definitional Topic: Understanding the Data for the Balance of Payments Account

113.	The balance on the balance of payments is equal to:
	A)	the balance on the current account.
	B)	the balance on the financial account.
	C)	zero.
	D)	the sum of the balances on the financial account plus the capital account.
	Ans: C Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

114.	For the past 50 years, the U.S. BOP has:
	A)	risen
	B)	held constant.
	C)	fallen.
	D)	fluctuated.
	Ans: B Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Fact-Based Topic: Understanding the Data for the Balance of Payments Account

115.	The current account deficit run by the United States during the past 20 years has been accompanied by:
	A)	higher real GDP and lower unemployment.
	B)	exports of assets to the rest of the world.
	C)	an increase in corporate profits.
	D)	an increase in the U.S. savings rate.
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Fact-Based Topic: Understanding the Data for the Balance of Payments Account

116.	From 1970–2008, the U.S. current account moved further into _______, and it was accompanied by a corresponding _____ in the financial account.
	A)	surplus; deficit
	B)	deficit; surplus
	C)	surplus; shortfall
	D)	balance; surplus
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Fact-Based Topic: Understanding the Data for the Balance of Payments Account

117.	The U.S. current account deficit, which has persisted for over 20 years, has resulted in a(n):
	A)	financial account deficit.
	B)	capital account deficit.
	C)	financial account surplus.
	D)	overall balance of payments deficit.
	Ans: C Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

118.	A nation that runs a current account deficit will also:
	A)	be a net importer of assets.
	B)	be a net exporter of assets.
	C)	suffer a lack of capital resources.
	D)	increase its external wealth.
	Ans: B Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: What the Balance of Payments Account Tells Us

119.	Current account is the difference between:
	A)	Gross national disposable income and gross national expenditure.
	B)	national income and net factor income from abroad.
	C)	Gross national income and gross national expenditure.
	D)	consumption expenditure and savings.
	Ans: A Difficulty: Easy Section: External Wealth Skill Descriptor: Definitional Topic: External Wealth

120.	Which of the following is FALSE?
	A)	Gross national disposable income is less than gross national expenditure, if and only if current account is positive or in surplus.
	B)	Gross national disposable income is less than gross national expenditure, if and only if current account is negative or in deficit.
	C)	Savings is greater than investment if and only if current account is positive or in surplus.
	D)	Savings is less than investment if and only if current account is negative or in deficit.
	Ans: A Difficulty: Difficult Section: External Wealth Skill Descriptor: Concept-Based Topic: External Wealth

121.	A nation’s external wealth is defined as:
	A)	rest of the world assets owned by the home nation minus home assets owned by foreigners.
	B)	home assets owned by foreigners minus ROW assets owned by the home nation.
	C)	home assets owned by foreigners plus ROW assets owned by the home nation.
	D)	home assets owned by foreigners, minus home assets owned by domestic entities, minus liabilities owned by domestic entities.
	Ans: A Difficulty: Easy Section: External Wealth Skill Descriptor: Definitional Topic: External Wealth

122.	A nation’s external wealth is the same thing as its:
	A)	balance with the IMF.
	B)	holdings of accounts in foreign banks.
	C)	total bonds issued.
	D)	net international investment position.
	Ans: D Difficulty: Easy Section: External Wealth Skill Descriptor: Definitional Topic: The Level of External Wealth

123.	When the total value of foreign assets owned by the home nation is less than the total value of home assets owned by foreigners, we say a nation is:
	A)	a net creditor to the rest of the world.
	B)	a net debtor to the rest of the world.
	C)	close to financial collapse.
	D)	under pressure to get help from the IMF.
	Ans: B Difficulty: Easy Section: External Wealth Skill Descriptor: Critical Thinking Topic: The Level of External Wealth

124.	Which of the following is TRUE?
	A)	Net exports of foreign assets cause a decrease in external wealth.
	B)	Net exports of home assets cause an increase in external wealth.
	C)	Net imports of foreign assets cause a decrease in external wealth.
	D)	Financial flows do not affect a nation’s international investment position.
	Ans: A Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: The Level of External Wealth

125.	When there are capital gains, such as in the real estate or stock markets, or there are exchange rate changes, we see a change in the external wealth calculation. These are known as:
	A)	financial flows.
	B)	investment flows.
	C)	valuation effects.
	D)	capital flows.
	Ans: C Difficulty: Easy Section: External Wealth Skill Descriptor: Definitional Topic: Changes in External Wealth

126.	A change in a nation’s external wealth consists of two parts:
	A)	a change in GDP plus the change in income.
	B)	financial flows plus valuation effects.
	C)	an increase in liabilities to the rest of the world matched equally by an increase of external assets.
	D)	debits and credits.
	Ans: B Difficulty: Easy Section: External Wealth Skill Descriptor: Definitional Topic: Changes in External Wealth

127.	Assume a nation’s external wealth is negative. Also assume all liabilities and assets are denominated in a foreign currency. How will its wealth change when its currency appreciates in world markets?
	A)	Its external wealth will rise.
	B)	Its external wealth will fall.
	C)	It depends on the currency in which it has its assets and liabilities.
	D)	There will be no change in the value of its wealth.
	Ans: A Difficulty: Difficult Section: External Wealth Skill Descriptor: Critical Thinking Topic: Changes in External Wealth

128.	External wealth can be increased in three ways. Which of the following is NOT a way for a nation to increase its external wealth?
	A)	selling assets to the rest of the world (ROW)
	B)	exporting more and importing less, thus increasing the current account balance
	C)	good fortune in holding assets that appreciate in value (capital gain)
	D)	forgiveness of debt or foreign aid or grants
	Ans: A Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: Changes in External Wealth

129.	If a nation experiences an exchange rate appreciation, what happens to the value of its external wealth?
	A)	It decreases.
	B)	It depends on the currency composition of its assets and liabilities.
	C)	It increases.
	D)	It depends on the size of its assets compared to the size of its liabilities.
	Ans: B Difficulty: Medium Section: External Wealth Skill Descriptor: Critical Thinking Topic: Changes in External Wealth

130.	Which of the following would cause a nation’s external wealth to decrease?
	A)	a decrease in domestic GDP
	B)	a decline in domestic real estate prices
	C)	a current account deficit
	D)	an increase in the unemployment rate
	Ans: C Difficulty: Difficult Section: External Wealth Skill Descriptor: Critical Thinking Topic: Changes in External Wealth

131.	When a country’s currency depreciates, its external wealth:
	A)	rises.
	B)	stays the same.
	C)	falls.
	D)	Not enough information is provided to answer the question.
	Ans: D Difficulty: Medium Section: External Wealth Skill Descriptor: Critical Thinking Topic: Changes in External Wealth

132.	The external wealth of the United States rose by nearly $800 billion during the financial crisis of 2009. What were some of the factors contributing to this rise?
	A)	There were price change effects (capital gains) and an appreciation of the dollar against other currencies.
	B)	The United States paid down a major portion of its outstanding external debt.
	C)	The United States received aid from other nations to help it through the financial crisis.
	D)	The United States borrowed from its own gold reserves.
	Ans: A Difficulty: Medium Section: External Wealth Skill Descriptor: Fact-Based Topic: Understanding the Data on External Wealth

133.	In 2009, U.S. liabilities were dollar-denominated corporate and official debt for the most part, while U.S. external assets were mostly equities, bank loans, government debt, and foreign direct investment, denominated in foreign currencies. When the dollar fell in the wake of the financial crisis, what net effect was there on U.S. external wealth?
	A)	No change occurred because the change in currency value affects everything equally.
	B)	External wealth rose since the value of liabilities was already in dollars and changed little, but assets denominated in foreign currencies increased in value.
	C)	External wealth declined since the dollar fell and U.S. assets were not worth as much.
	D)	External wealth declined since the weak dollar forced the United States to default on loans.
	Ans: B Difficulty: Difficult Section: External Wealth Skill Descriptor: Fact-Based Topic: Understanding the Data on External Wealth

134.	If one nation experiences a gain in its external wealth due to valuation effects only, combined, the other nations in the world will experience:
	A)	an equal gain since all currencies are worth more.
	B)	no change in external wealth.
	C)	an equal decline in external wealth.
	D)	an increase in the interest they earn.
	Ans: C Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: Understanding the Data on External Wealth

135.	The primary driving force behind changes in external wealth is:
	A)	an imbalance between a nation’s total income and its total spending.
	B)	a change in the value of stocks and bonds.
	C)	financial innovation that creates different kinds of assets, which may then obscure their true value.
	D)	irresponsible investment and lax government regulation.
	Ans: A Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: What External Wealth Tells Us

136.	The Greeks overstated GDP prior to joining the European Union by including:
	A)	consumption.
	B)	black-market activities.
	C)	government spending.
	D)	investment spending
	Ans: B Difficulty: Easy Section: Conclusions Skill Descriptor: Fact-Based Topic: Conclusions

137.	Your text has a discussion of various ways nations can skew income, production, and price-level data. Why would any nation choose to do so?
	A)	to avoid paying its debts
	B)	to avoid lower credit ratings or ease concerns of foreign investors
	C)	to keep the rich from getting richer
	D)	to increase its external wealth
	Ans: B Difficulty: Medium Section: Conclusions Skill Descriptor: Concept-Based Topic: Conclusions

138.	Describe issues involved in measuring trade and financial flows in an open economy.
	Ans:	When an economy is open there are many kinds of cross-border flows, and so measurement is a challenge. In recent times, the volume of trade and financial flows has reached unprecedented levels. Further, many transactions cannot be measured, especially in economies such as China and India that are expanding trade and developing monitoring systems. Trade and financial flows are related to changes in asset holdings, increasing the importance of accurate accounting.
	Difficulty: Easy Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Concept-Based Topic: Measuring Macroeconomic Activity: An Overview

139.	Explain the difference between GDP and GNI in an open economy, and why this is an important distinction.
	Ans:	GDP is the total value of all final goods and services produced in the country, while GNI is Gross National Income and adds net factor income from abroad. GDP may under- or overestimate how much domestic residents have to spend.
	Difficulty: Medium Section: Measuring Macroeconomic Activity: An Overview Skill Descriptor: Concept-Based Topic: The Flow of Payments in an Open Economy: Incorporating the Balance of Payments Accounts

140.	Explain the relationship between GNE, GNI and GDP in a closed economy
	Ans:	They are the same. GNE is the amount of spending done in an economy. If the economy is closed, you can only buy that which is produced (GDP). When the output is sold, it will generate an equal amount of income (GNI) for the factors of production used in producing the goods.
	Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: Three Approaches to Measuring Economic Activity

141.	Looking at the balance of payments for the United States, suppose you see that there is a current account surplus but a trade deficit. How is this possible?
	Ans:	The current account consists of net factor income from abroad and net unilateral transfers from abroad as well as the trade balance. If the trade balance is negative, it must be that the United States is receiving more income from abroad from factor services and/or receiving transfers from abroad in a larger amount than the trade deficit.
	Difficulty: Easy Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the National Economic Aggregates Tell Us

142.	Many U.S. residents complain that the nation should take care of its own needs before being generous with taxpayer funds donated to foreign lands. Based on the discussion in the text box on “Stingy Americans,” analyze that complaint.
	Ans:	The United States is the largest international aid donor. But, based on percentages and on a per-capita basis, the United States is relatively stingy with aid, compared to many European nations. On the other hand, the United States assists poor nations in other forms through in-kind aid, defense grants, purchases of their exports, and allowing foreign workers to repatriate earnings.
	Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: Are Rich Countries “Stingy” with Foreign Aid?

143.	The United States has experienced large and growing current account deficits for more than 20 years, whereas Japan has experienced large and growing current account surpluses for roughly the same period. The U.S economy has grown at faster rates than Japan’s over the past 10 years. What might explain the difference? Relate your answer to the relationship between the current account and GDP.
	Ans:	The current account deficit represents an inflow of borrowed funds from foreign sources used to purchase goods and services from abroad. The United States is a user of such funds, whereas Japan has been a supplier. If the United States uses the funds to finance the production (domestic or imported) of capital goods that build economic capacity, it could enhance growth. On the other hand, Japan is a supplier of funds to foreign sources, and therefore the level of domestic investment may not be as high and growth would suffer. Japan is helping finance growth in foreign economies. Even though a current account deficit means that GDP is lower than GNDI, if spending winds up on investment projects, it can enhance a nation’s growth.
	Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the Current Account Tells Us

144.	Your text authors state that in the long run a nation cannot sustain current account deficits and that every nation must eventually “live within its means.” What does that mean? What implications are there for the United States?
	Ans:	Current account deficits indicate an inflow of borrowed funds from abroad. These can be in the form of foreign equity or debt investment. Nations running current account deficits therefore experience a continual increase in international debt. As long as the economy grows faster than the accumulation of international debt, the situation is sustainable. But the debt must be serviced by payouts of interest or dividends, and at some point the nation must earn those funds by exports. Any economic event such as inflation, bankruptcies, or low profits, or even a fall in the value of the currency, can cause foreign investors to pull out their funds, and cause asset prices to plunge and interest rates to rise dramatically. Most economists consider it to be dangerous to get into a situation in which a nation is dependent on inflows of foreign funds.
	Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Analytical Thinking Topic: What the Current Account Tells Us

145.	The current account balance is equivalent to an excess of domestic expenditure (C + I + G) over gross national domestic income (GNDI). Some say a government budget deficit adds to this problem. Why?
	Ans:	If the government runs a deficit, it is spending more than it is taxing. It can borrow from the public, which may reduce private saving. If so, then the balance on the current account is equal to the government budget deficit (G − T) plus the private savings deficit (I − S). Some economists believe that the certainty of future taxes to repay a buildup of government debt (principal and interest) will cause people to increase their private savings (decrease consumption) to offset some of the deficit. This proposition is called the Ricardian equivalence theorem.
	Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: What the Current Account Tells Us

146.	Suppose consumers decide to save a smaller proportion of their income. What are the implications for the current account? The financial account?
	Ans:	If S falls, consumers will buy more of everything, including foreign goods. This will cause imports to rise and the TB will fall. Since the TB is part of the current account, this change is associated with a current account debit. This gives foreigners additional income in the form of domestic assets. And this suggests we are exporting financial assets, which is a credit in the financial account.
	Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Critical Thinking Topic: What the Current Account Tells Us

147.	What is meant by “twin deficits”?
	Ans:	When public saving (T − G) is negative, it can be enough to cause the trade balance to fall into deficit. In such a situation, here is a budget deficit and a trade deficit.
	Difficulty: Medium Section: Income, Product, and Expenditure Skill Descriptor: Concept-Based Topic: Global Imbalances

148.	When analyzing the financial account of the balance of payments, there may be a situation in which the overall balance is not equal to zero. What could cause this to happen and how does BOP accounting handle it?
	Ans:	When tracking and summarizing a nation’s international financial activity, measurement errors, reporting shortfalls, and illegal activities, such as smuggling, tax evasion, and money laundering, may result in a situation in which −CA ¹ FA + KA. The discrepancy is recorded as an offset or balancing item in a category (for the United States) called statistical discrepancy.
	Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Accounting for Home and Foreign Assets

149.	Suppose the following transactions take place: (1) A U.S. book publisher sells $20,000 of books to a Chinese firm. The firm pays for the books by using its Chinese-based credit card company.; (2) Vlad, a Russian citizen working in New York, earned $6,000 last year working at a factory owned by a U.S .company, and (3) BNP Paribas (a French bank) has just purchased 20% of outstanding stock in First Commercial Bank (U.S.) for $200,000 million from Warren Buffet (a U.S. citizen). Buffet takes the check and puts it in his U.S. bank account. Assuming we started with a trade deficit of zero. What will these transactions do to our trade deficit?
	Ans:	The first transaction is a TB credit of $20,000 and an import of a foreign financial asset (claim on a Chinese credit card company). The second is an import of a factor service and is a NFIA debit, with an associated credit on the financial account as we export an asset (a claim on the U.S. company’s checking account). The third is importing a financial asset (stock), while exporting one at the same time (Warren Buffet’s checking account). In sum, the total impact is that the United States now has a trade surplus of $20,000.
	Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

150.	Suppose the following transactions take place: (1) A U.S. book publisher sells $20,000 of books to a Chinese firm. The Chinese firm pays for the books by using its China-based credit card company; (2) Vlad, a Russian citizen working in New York, earned $6000 last year working at a factory owned by a U.S. company, and (3) BNP Paribas (a French bank) has just purchased 20% of outstanding stock in First Commercial Bank (a U.S. bank) for $200,000 million from Warren Buffet (a U.S. citizen). Warren Buffet takes the check and puts it in his U.S. bank account. What will these transactions do to net external wealth?
	Ans:	The first transaction is a TB credit of $20,000 and an import of a foreign financial asset (a claim on a Chinese credit card company). The second transaction is an import of a factor service and is a NFIA debit, with an associated credit on the financial account when an asset is exported from the United States (a claim on the U.S. company’s checking account). The third transaction involves importing a financial asset (stock) while exporting one at the same time (Warren Buffet’s checking account). In sum, the total impact of these transactions is that the United States now has rising net external wealth-in this case, of $14,000.
	Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Critical Thinking Topic: How the Balance of Payments Accounts Work: A Macroeconomic View

151.	Occasionally, dramatic changes in financial account balances are recorded yearly. How is the financial account balance recorded, and what factors may influence the calculation?
	Ans:	The financial account records the balance of flows of a nation’s international asset purchases and sales with other nations. Occasionally, a dramatic event occurs, such as an extreme fall in currency values or a loss of value in equities or bonds (often a result of corporate credit problems). These valuation effects can occur swiftly and dramatically as in the example of the Finnish economy in the textbook. Recent fluctuations in the U.S. stock market also illustrate this point.
	Difficulty: Easy Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

152.	Explain why a nation with a current account deficit is a net external borrower, while a nation with a current account surplus is a net external lender.
	Ans:	A current account deficit indicates that a nation has spent more than it has earned in income. Further, it can be shown that the current account deficit is equal to a capital plus financial account surplus, which indicates the sale of assets. Therefore, it must be true that a nation with a current account deficit is a net external borrower, while a nation with a current account surplus is a net external lender.
	Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

153.	Explain why sometimes the balance of payments does not balance to zero. What remedy do we apply to fix the problem?
	Ans:	The balance of payments has offsetting accounts where both sides of every transaction are recorded. However, sometimes one side of the transaction is not recorded properly due to measurement issues or perhaps it might be an illegal transaction. In that case, we recognize that the balance of payments identity will hold true, and so we correct the financial account by adding in a statistical discrepancy equal to the current account balance plus the capital account plus the financial account. The result is that the two major accounts are in balance.
	Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

154.	Give an intuitive explanation that captures the relationship between the current account position (surplus or deficit) and the role of country as a net borrower or lender.
	Ans:	If a country has a current account deficit, it means the country is spending more than it is earning in income. The only way this is possible is if some foreigners are willing to give loans to the country to finance the deficit. Thus, a current account deficit is associated with being a net borrower.
	Difficulty: Medium Section: The Balance of Payments Skill Descriptor: Concept-Based Topic: Understanding the Data for the Balance of Payments Account

155.	What two reasons could cause a change in a nation’s external wealth?
	Ans:	It can be causes by buying or selling financial assets or by changes in the value of currently held assets or outstanding liabilities (Valuation effects).
	Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: Changes in External Wealth

156.	What role do exchange rates play in the net external wealth of a country? Illustrate by explaining what an exchange rate appreciation can do to a country holding an asset denominated in foreign currency.
	Ans:	If a country holds an asset denominated in a foreign currency, if it wanted to sell this asset, it would have to convert the proceeds back into its own local currency. If the country’s currency becomes more valuable, once the asset it sold, the foreign currency buys fewer local currency units. As a result, the value of the asset has fallen and the country’s net external wealth has decreased.
	Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: Changes in External Wealth

157.	Over the past 30 years, the United States has experienced rising CA deficits. What have been the impacts of the deficits? What fallout has there been on the U.S. economy?
	Ans:	The United States has experienced a decline in external wealth as it has experienced financial inflows to offset these deficits. These inflows mean that the United States is selling assets to foreigners (technically borrowing money to fund the CA deficits). Over the past 30 years, the United States was transformed from the world’s largest net creditor (assets against the rest of the world minus liabilities) to the world’s largest net debtor. But valuation effects related to the U.S. dollar exchange rate and the value of U.S. financial assets have to some degree mitigated the rise in debt. So far, because there have been such large inflows, there has been very little impact on interest rates or the ability of U.S. corporations or the U.S. federal government to issue bonds. How long into the future the current account deficit can continue is a topic of great interest at the time of this writing.
	Difficulty: Medium Section: External Wealth Skill Descriptor: Concept-Based Topic: Understanding the Data on External Wealth

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