PRACTICE QUESTIONS ON CH. 13 (NATIONAL INCOME ACCOUNTING AND THE BALANCE OF
PAYMENTS) ECO41 UDAYAN ROY
These questions are based on the sections “The National Income Accounts” and “National Income
Accounting for an Open Economy” of Chapter 13 of International Economics by Krugman, Obstfeld, and Melitz, Tenth Edition.
1.
A country’s ____ is the market value of all final goods and services produced (for sale) by the factors of production (or, resources) owned by the permanent residents (or, nationals) of the country in a given time period. a.
Gross Domestic Product b.
Gross National Product c.
Net Domestic Product d.
National Income
2.
A country’s ____ is the market value of all final goods and services produced within the country’s borders in a given time period. a.
Gross Domestic Product b.
Gross National Product c.
Net Domestic Product d.
National Income
3.
Let a country’s net receipts of factor income from the rest of the world = income earned by the permanent residents of the country for work done abroad by them or with resources owned by them minus income earned by the permanent residents of other countries for work done in the country by them or with resources owned by them. Then a.
GNP = GDP + net receipts of factor income from the rest of the world b.
GDP = GNP + net receipts of factor income from the rest of the world c.
Exports – Imports = net receipts of factor income from the rest of the world d.
GNP = GDP + Exports – Imports e.
GDP = GNP + Exports – Imports
4.
As in the textbook, let Y stand for GNP, C for consumption spending, I for investment spending, G for government purchases, EX for exports, IM for imports, and CA for the current account balance. Then a.
Y = C + I + G. b.
Y = C + I + G + EX + IM. c.
Y = C + I + G + EX – IM. d.
Y = C + I + G – CA.
5.
Let T be the net tax revenues of the government. That is, T = tax revenues – transfer payments (such as, pensions for retirees, unemployment benefits, cash grants for poor people, etc.). Then, National
Saving (S) is defined as a.
S = Y – (C + I + G)

b.
S = Y – C – G c.
S = T – G d.
S = Y – T – C.
6.
Private Saving (S p ) is defined as a.
S p = Y – (C + I + G) b.
S p = Y – C – G c.
S p = T – G d.
S p = Y – T – C.
7.
Public Saving (S g ) is defined as a.
S g = Y – (C + I + G) b.
S g = Y – C – G c.
S g = T – G d.
S g = Y – T – C.
8.
Movements in GDP a.
and GNP usually do not differ greatly, as a practical matter. b.
and GNP usually do differ greatly. c.
are usually smaller than those of GNP movements, in practice. d.
are inversely proportional to movements in GNP.
9.
In 2012, the United States had a.
a surplus in the current account. b.
a balance in the current account. c.
a deficit in the current account. d.
From 2012 data, it is too difficult to determine whether a surplus or a deficit existed in the current account. e.
a positive balance of net financial flows.
10.
In open economies, a.
saving and investment are necessarily equal. b.
as in a closed economy, saving and investment are not necessarily equal. c.
saving and investment are not necessarily equal. But they are equal in a closed economy. d.
saving and investment are necessarily equal contrary to the case of a closed economy. e.
investment always refers to the domestic stock market.
11.
Government purchases are defined as a.
only goods purchased by federal, state, or local governments. b.
all goods and services purchased by the federal government. c.
all goods and services purchased by the federal or state government. d.
all goods and services purchased by the federal, state, or local government.
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e.
goods and services purchased from the government.
12.
Government transfer payments like social security and unemployment benefits are a.
included in government purchases. b.
not included in government purchases. c.
not included in government purchases, but they are included in the consumption component of
GNP. d.
not included in government purchases, but they are part of the investment component of GNP. e.
included in government purchases but not in the GNP.
13.
A country’s current account a.
balance equals the increase in its net foreign wealth. b.
surplus equals the increase in its foreign wealth. c.
deficit equals the increase in its foreign wealth. d.
balance equals its GNP.
14.
Which of the following is true? a.
A country with a current account surplus is earning more from its exports than it spends on imports. b.
A country could finance a current account deficit by using previously accumulated foreign wealth to pay for its imports. c.
A country with a current account deficit must be increasing its net foreign debts by the amount of the deficit. d.
We can describe the current account surplus as the difference between income and absorption. e.
All of the above are true of current account balances.
15.
An open economy a.
can save for its future only by building up its capital stock. b.
can save for its future only by acquiring foreign wealth. c.
cannot save for its future either by building up its capital stock or by acquiring foreign wealth. d.
can save for its future either by building up its capital stock or by acquiring foreign wealth. e.
can save for its future by avoiding excessive imports.
16.
A closed economy a.
can save for its future either by building up its capital stock or by acquiring foreign wealth. b.
can save for its future only by building up its capital stock. c.
can save for its future only by acquiring foreign wealth. d.
cannot save for its future either by building up its capital stock or by acquiring foreign wealth. e.
can save for its future by avoiding excessive imports.
17.
Disposable income is national income a.
less taxes collected from households and firms by the government.
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b.
plus net taxes collected from households and firms by the government. c.
less net taxes collected from households by the government. d.
less net taxes collected from households and firms by the government.
18.
Which of the following is true? a.
If the government reduces its budget deficit—say, by raising taxes and keeping expenditures unchanged—then the current account balance (CA) will increase b.
If households cut back on spending and thereby increase their saving, then the current account balance will increase c.
Only if the government reduces its budget deficit and households increase their saving, will the current account balance increase d.
Only if the excess of national saving over domestic business investment increases, will the current account balance increase
19.
Which of the following is true? a.
A country’s imports cannot exceed its exports in value, because that would mean getting something for nothing from foreigners b.
A country’s imports cannot be less than its exports in value, because that would mean giving the foreigners more than it is getting from them c.
The value of a country’s exports must be equal to the value of its imports d.
None of the above. Exports can exceed imports, and in that case the country’s net foreign wealth increases e.
None of the above. Exports can exceed imports, and in that case the country’s net foreign wealth decreases
20.
The national income identity for the open economy implies that a.
CA = S + I; therefore, a country can have a current account surplus only if it saves and invests more b.
CA = S – I; therefore, a country can have a current account surplus only if it saves more than its businesses invest c.
CA = I – S; therefore, a country can have a current account surplus only if it saves less than its businesses invest d.
None of the above. A country’s saving must be equal to its investment.
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