21. Open-Economy Macroeconomics
Balance of Payments: Introduction
Multiple Choice
Which statement describes part of the United States' role in the global economy as reflected in its balance of payments?
A
The United States' balance of payments only records domestic transactions and excludes foreign trade.
B
The United States often runs a current account deficit, importing more goods and services than it exports.
C
The United States consistently maintains a trade surplus with all of its major trading partners.
D
The United States does not participate in international financial transactions.
Verified step by step guidance1
Step 1: Understand the concept of the balance of payments (BOP). The BOP is a record of all economic transactions between residents of a country and the rest of the world over a specific period. It includes the current account (trade in goods and services, income, and current transfers) and the capital and financial account (investment flows, loans, and financial assets).
Step 2: Recognize that the United States' balance of payments includes both domestic and international transactions, so the statement that it only records domestic transactions is incorrect.
Step 3: Analyze the current account component, which reflects trade in goods and services. The United States often imports more goods and services than it exports, leading to a current account deficit. This means the U.S. spends more on foreign products than it earns from selling its own products abroad.
Step 4: Understand that the U.S. does participate in international financial transactions, such as foreign investment and borrowing, so the statement denying this participation is false.
Step 5: Note that the U.S. does not consistently maintain a trade surplus with all major trading partners; in fact, it often runs deficits with many of them. Therefore, the correct description is that the U.S. often runs a current account deficit, importing more than it exports.
