International Trade and Balance of Payments # MCQs Practice set

Q.1 Which of the following is a primary reason for international trade?

To increase domestic unemployment

To exploit comparative advantage

To decrease domestic production

To reduce foreign exchange reserves

Explanation - Countries engage in international trade to take advantage of differences in opportunity costs and specialize in producing goods where they have a comparative advantage.

Correct answer is: To exploit comparative advantage

Q.2 Which term refers to the value of exports minus the value of imports of goods and services?

Balance of Payments

Trade Surplus/Deficit

Current Account Balance

Capital Account Balance

Explanation - The current account measures a country's trade in goods and services along with net income and current transfers.

Correct answer is: Current Account Balance

Q.3 What is the meaning of 'tariff' in international trade?

A limit on imports

A tax on imports

A subsidy on exports

A free trade agreement

Explanation - A tariff is a tax imposed by a government on imported goods to make them more expensive and protect domestic industries.

Correct answer is: A tax on imports

Q.4 Which organization primarily deals with regulating international trade?

IMF

World Bank

WTO

UNESCO

Explanation - The World Trade Organization (WTO) oversees international trade rules, resolves disputes, and promotes free trade.

Correct answer is: WTO

Q.5 A country has a trade deficit. What does this indicate?

Exports > Imports

Imports > Exports

No trade with other countries

Exports = Imports

Explanation - A trade deficit occurs when a country's imports exceed its exports, meaning it buys more from abroad than it sells.

Correct answer is: Imports > Exports

Q.6 Which of the following is an example of a non-tariff barrier?

Import quota

Export subsidy

Income tax

Sales tax

Explanation - Non-tariff barriers include quotas, licensing requirements, and regulations that restrict imports without using tariffs.

Correct answer is: Import quota

Q.7 What is 'foreign exchange rate'?

Rate at which one country trades goods with another

Price of one currency in terms of another

Rate of domestic inflation

Interest rate on international loans

Explanation - The foreign exchange rate indicates how much one currency is worth compared to another, influencing trade and investment.

Correct answer is: Price of one currency in terms of another

Q.8 Which of the following is recorded in the capital account of the balance of payments?

Exports of goods

Imports of services

Foreign investment in domestic assets

Tourism receipts

Explanation - The capital account records capital flows such as foreign investment in domestic assets and loans, while the current account covers trade in goods and services.

Correct answer is: Foreign investment in domestic assets

Q.9 Which of these is an effect of protectionist policies?

Lower domestic production

Increased imports

Higher domestic prices

Reduced government revenue

Explanation - Protectionist policies like tariffs or quotas limit imports, reducing competition and often raising domestic prices.

Correct answer is: Higher domestic prices

Q.10 Which type of trade occurs when a country exports and imports the same kind of good?

Intra-industry trade

Inter-industry trade

Bilateral trade

Multilateral trade

Explanation - Intra-industry trade occurs when countries simultaneously import and export similar goods, often due to product differentiation and economies of scale.

Correct answer is: Intra-industry trade

Q.11 What is the function of the International Monetary Fund (IMF) in trade?

To impose tariffs

To provide short-term financial assistance and stabilize exchange rates

To promote free trade agreements

To regulate production quotas

Explanation - IMF provides loans to countries facing balance of payments problems and helps stabilize global exchange rates.

Correct answer is: To provide short-term financial assistance and stabilize exchange rates

Q.12 Which of the following best describes 'comparative advantage'?

Producing a good at lower absolute cost than another country

Producing a good with lower opportunity cost than another country

Producing goods without trading

Producing the same goods as another country

Explanation - Comparative advantage occurs when a country can produce a good at a lower opportunity cost, making trade mutually beneficial.

Correct answer is: Producing a good with lower opportunity cost than another country

Q.13 What is a 'trade bloc'?

A group of countries that trade only with outsiders

A region where countries reduce trade barriers among themselves

A type of import tariff

A system to fix exchange rates

Explanation - Trade blocs are agreements where countries reduce tariffs and other trade barriers to encourage intra-regional trade.

Correct answer is: A region where countries reduce trade barriers among themselves

Q.14 Which of the following can improve a country’s balance of payments?

Increase in imports

Decrease in exports

Increase in foreign investment

Reduction in domestic savings

Explanation - Capital inflows like foreign investment improve the balance of payments by increasing reserves or financing deficits.

Correct answer is: Increase in foreign investment

Q.15 Which method is commonly used to protect infant industries?

Export subsidy

Tariffs and quotas

Floating exchange rate

Trade liberalization

Explanation - Infant industries are protected by tariffs and quotas to shield them from international competition until they become competitive.

Correct answer is: Tariffs and quotas

Q.16 A positive balance of payments means:

Imports exceed exports

Exports exceed imports

No trade occurs

Currency value decreases

Explanation - A positive balance indicates that a country earns more from exports than it spends on imports, leading to a surplus.

Correct answer is: Exports exceed imports

Q.17 Which of the following can lead to a currency depreciation?

Increase in exports

Decrease in interest rates

Capital inflows

High foreign reserves

Explanation - Lower interest rates make domestic assets less attractive, reducing demand for the currency and leading to depreciation.

Correct answer is: Decrease in interest rates

Q.18 Which of these is a benefit of free trade?

Higher prices for domestic goods

Efficient resource allocation

Reduced competition

Trade deficits

Explanation - Free trade allows countries to specialize in goods with comparative advantage, leading to efficient global resource allocation.

Correct answer is: Efficient resource allocation

Q.19 Which account includes transfer payments like remittances in the balance of payments?

Current account

Capital account

Financial account

Reserves account

Explanation - The current account includes trade in goods and services, income, and current transfers such as remittances.

Correct answer is: Current account

Q.20 Which of the following is an example of a bilateral trade agreement?

NAFTA

US-Japan Trade Agreement

WTO regulations

Explanation - Bilateral trade agreements involve two countries negotiating terms for trade and cooperation.

Correct answer is: US-Japan Trade Agreement

Q.21 Which of the following is NOT a function of foreign exchange reserves?

Stabilize currency

Finance trade deficits

Regulate domestic inflation

Repay foreign debt

Explanation - Foreign exchange reserves help stabilize the currency, pay for imports, and repay foreign debt, but they do not directly control domestic inflation.

Correct answer is: Regulate domestic inflation

Q.22 Which economic theory explains the benefits of specialization and trade?

Absolute advantage

Comparative advantage

Mercantilism

Keynesian theory

Explanation - Comparative advantage shows that countries benefit from specializing in goods where they have the lowest opportunity cost and trading with others.

Correct answer is: Comparative advantage

Q.23 Which of the following could lead to a balance of payments deficit?