International Economics - The Final Quiz - Part 1

1. Poor countries tend to have high openness.

True

False

Openness is (X+M)/GDP; thus, in general, poor country will have an high degree due to a poor production (low GDP and need to import lots of goods).

Explanation

Openness is (X+M)/GDP; thus, in general, poor country will have an high degree due to a poor production (low GDP and need to import lots of goods).

2. Developing countries tend to have a GNP ______ the GDP, respect to the developed ones.

Higher than

Equal to

Lower than

There isn't a clear difference in GDP/GNP between developed and developing countries.

GNP is actually lower than the GDP because developing countries are usually targets of vertical FDIs, which production is not included in the GNP.

Explanation

GNP is actually lower than the GDP because developing countries are usually targets of vertical FDIs, which production is not included in the GNP.

3. If in a given country citizens do not own foreign firm, GNP and GDP coincide.

True

False

GNP = GDP if the citizens don't own foreign firm AND the firms on the territory are not foreign-owned.

Explanation

GNP = GDP if the citizens don't own foreign firm AND the firms on the territory are not foreign-owned.

4. Put this transaction in the right part of the balance of payment: A. Aid received from foreign country due to natural disaster. B. Income from foreign investments in production activities. C. Trade Balance. D. Outward FDI.

Current account: C, D; Financial and capital: A, B.

Current account: B, C; Financial and capital: A, D.

Current account: C; Financial and capital: A, B, D.

Current account: A, B; Financial and capital: C, D.

The correct answer is Current account: B, C; Financial and capital: A, D. This is because income from foreign investments in production activities (B) falls under the current account as it represents a flow of funds between countries for the purpose of producing goods and services. Trade balance (C) also falls under the current account as it represents the difference between a country's exports and imports. Aid received from foreign country due to natural disaster (A) falls under the financial and capital account as it represents a one-time transfer of funds. Outward FDI (D) also falls under the financial and capital account as it represents a country's investment in foreign countries.

Explanation

The correct answer is Current account: B, C; Financial and capital: A, D. This is because income from foreign investments in production activities (B) falls under the current account as it represents a flow of funds between countries for the purpose of producing goods and services. Trade balance (C) also falls under the current account as it represents the difference between a country's exports and imports. Aid received from foreign country due to natural disaster (A) falls under the financial and capital account as it represents a one-time transfer of funds. Outward FDI (D) also falls under the financial and capital account as it represents a country's investment in foreign countries.

5. The exchange ratio (nominal) between the Colombian Peso and the US dollar (measured as Peso/$) in a certain year doubles its value; the average income of the Colombian inhabitants however does not show particular modifications, and so do their consumption possibilities. Given that Colombia import from US a negligible percentage of its total import, what is the effect on the Colombian GDP calculated in US dollar with the purchase power parity method?

It double.

It decreases.

It remains constant.

It increase but not double.

There are not enough data to answer.

The fact that income and consumption possibilities remain constant is an index that the GDP of Colombia did not change, and so did the prices. That means the GDP with the PPP method did not change as well. This is why PPP method is used.

To be more precise, also the last one could be correct, because of there are no data regarding the variations of the price in the US, that can modify the PPP.

Explanation

The fact that income and consumption possibilities remain constant is an index that the GDP of Colombia did not change, and so did the prices. That means the GDP with the PPP method did not change as well. This is why PPP method is used.

To be more precise, also the last one could be correct, because of there are no data regarding the variations of the price in the US, that can modify the PPP.

6. An increase in investments by the firms of a country can be, in the short term, the cause of a trade surplus.

True

False

The increase in investments is an account for future production, and then, in the short term, a need for importation, that is, a possible trade deficit.

Explanation

The increase in investments is an account for future production, and then, in the short term, a need for importation, that is, a possible trade deficit.

7. Which of the following country will probably have a LOW degree of openness?

A middle-east oil exporter.

A relatively small country with a strong specialization in state-of-the-art microchips.

A rich country with high degree of productivity in different industries.

A relatively small country that export high-quality agricultural product

Degree of openness of these countries are not clear.

Middle-east oil exporter, strong specialization (also in agricultural product) especially in small country give high openness.

Rich countries have in general low openness, especially if are not fully specialized.

Explanation

Middle-east oil exporter, strong specialization (also in agricultural product) especially in small country give high openness.

Rich countries have in general low openness, especially if are not fully specialized.

8. Which of these goods must NOT be included in the computation of the Gross National Product of Ireland

Beer produced by a not-listed company owned by an Ireland family that employs workers of different nationalities.

Beer company owned by Ireland citizens that owns no asset in Ireland but two production facilities in India.

Beer company that employs only Ireland citizens and sells only in Ireland but is owned by an US firm.

The production of these three alternatives are all included in the GNP.

The difference between GDP and GNP is the ownership of the firm that produce: if the company is owned by an US company, it will be included in the US GNP.

Explanation

The difference between GDP and GNP is the ownership of the firm that produce: if the company is owned by an US company, it will be included in the US GNP.

9. The so-called total resources available in the country are formalized (referring to the classical GDP Equation) as:

GDP

GDP + IMP

GDP - EXP

GDP + (IMP - EXP)

C + I + G

Given GDP + IMP = C + G + I + EXP, the first part is the total resources available, while the second part is called total uses.

Explanation

Given GDP + IMP = C + G + I + EXP, the first part is the total resources available, while the second part is called total uses.