Answer to Question #90527 in Macroeconomics for Sung Eun Seok

Question

20. Which of the following would be an indication that a nation has a persistent balance of
payment deficit?
A. it is buying gold abroad
B. it is borrowing abroad to finance capital investments
C. its imports exceed exports
D. Its holdings of foreign reserves are declining.

Answer 1

D. Its holdings of foreign reserves are declining.

A deficit balance of payment means that a nation imports mores services, capital, and goods than it is exporting. That is a nation is said to have a deficit balance of payment if it imports more than it exports. However, the mere fact that a country’s imports exceed exports does not indicate that the nation has a persistent balance of payment deficit.

Balance of payment deficit can be caused by high growth rates which can be unsustainable. When the trade deficit becomes large, this will drain the foreign reserves of the nations. The draining and declining of foreign reserves hold by a nation can thus indicate that a nation has a persistent balance of payment deficit.