Question

Which of the following statements is true?

A)If a consumer in UK buys a camera from a manufacturer in the U.S., everything else remaining unchanged, there will be a deficit in UK's financial account.

B)Suppose a country's net exports equal zero. If the volume of imports increases without an increase in the volume of exports, then the country will experience a trade deficit.

C)A current account surplus can occur if net exports is negative, all other variables remaining unchanged.

D)Edward lives in England, and he makes a donation of $100,000 dollars to Food for the Poor, a charitable organization in the United States. Edward's donation will be counted as a factor payment in England's current account.

Answer 1

Option B (Suppose a country's net exports equal zero. If the volume of imports increases without an increase in the volume of exports, then the country will experience a trade deficit) is true.

Reason: Net export or trade balance is calculated as:

Net export = Export - Import

Therefore, higher import with unchanged export will cause negative trade balance which is known as trade deficit.

Reason of other options:

A. False. Because financial account only consider those transactions which are related to financial assets sich as foreign direct investment.

C. False, With negative export, current account will reduce and can cause current account deficit.

D. False. The donation is the unilateral or one sided transaction and therefore will not be considered as factor payment.