International Economics and Development: Balance of Payments, Exchange Rates, Terms of Trade, Comparative Advantage, Protectionism, Globalisation, HDI, Debt, Aid, MNCs

1. The current account of the balance of payments records

A trade in goods and services, primary income and secondary income
B only government tax revenue
C only bank lending and borrowing
D only changes in domestic unemployment

2. A current account deficit occurs when

A current account payments exceed current account receipts
B current account receipts exceed current account payments
C exports of goods are always greater than imports of goods
D government revenue exceeds government spending

3. A current account surplus occurs when

A imports exceed exports and income outflows exceed inflows
B current account receipts exceed current account payments
C government spending exceeds tax revenue
D capital outflows exceed capital inflows only

4. Which transaction is recorded as a credit item in the current account?

A export of goods
B import of services
C payment of dividends to foreign shareholders
D foreign aid sent abroad

5. Which transaction is recorded as a debit item in the current account?

A export of financial services
B foreign tourists spending money domestically
C imports of machinery
D profits received from overseas investments

6. A country exports goods worth $400bn and imports goods worth $520bn. Its balance of trade in goods is

A $120bn surplus
B $120bn deficit
C $400bn deficit
D $920bn surplus

7. A country has goods balance -$80bn, services balance +$50bn, primary income balance -$20bn and secondary income balance +$10bn. Its current account balance is

A -$40bn
B +$40bn
C -$140bn
D +$60bn

8. A persistent current account deficit may be caused by

A low international competitiveness
B high export growth compared with import growth
C domestic currency undervaluation always
D high domestic saving and low consumption only

9. Which is most likely to reduce a current account deficit?

A depreciation of the exchange rate, if demand is sufficiently elastic
B higher domestic inflation than trading partners
C lower foreign income
D increased consumer spending on imports

10. The Marshall-Lerner condition states that depreciation improves the current account if

A PED for exports + PED for imports is greater than 1
B PED for exports + PED for imports is less than 1
C exports and imports are perfectly inelastic only
D domestic inflation is always zero

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. The J-curve effect suggests that after depreciation the current account may

A worsen first, then improve later
B improve immediately, then worsen permanently
C remain unchanged forever
D improve only if imports become cheaper

12. The J-curve effect occurs partly because

A trade contracts and consumer habits take time to adjust
B import prices fall immediately after depreciation
C exports become more expensive abroad
D demand for imports instantly becomes perfectly elastic

13. A currency appreciation is most likely to

A make exports dearer and imports cheaper
B make exports cheaper and imports dearer
C increase export competitiveness automatically
D cause imported inflation immediately

14. A currency depreciation is most likely to

A make exports cheaper and imports dearer
B make exports dearer and imports cheaper
C reduce import prices
D reduce domestic inflation through import costs

15. A floating exchange rate is determined by

A demand and supply of the currency in foreign exchange markets
B government fixing the currency permanently
C the unemployment rate only
D the central bank’s gold reserves only

16. Which factor is most likely to cause a currency to appreciate?

A higher domestic interest rates attracting capital inflows
B lower export demand
C higher domestic inflation reducing competitiveness
D capital flight from the economy

17. Which factor is most likely to cause a currency to depreciate?

A loss of investor confidence
B higher demand for exports
C higher interest rates attracting hot money
D rising foreign direct investment inflows

18. A fixed exchange rate requires the central bank to

A intervene in the foreign exchange market to maintain the peg
B allow the currency to move freely
C remove all foreign reserves
D stop all international trade

19. To prevent a fixed exchange rate from falling below its target, a central bank may

A buy its own currency using foreign reserves
B sell its own currency to increase supply
C lower interest rates to encourage outflows
D increase imports by reducing tariffs

20. A disadvantage of a fixed exchange rate is that

A monetary policy may lose independence
B exchange rate uncertainty always rises
C reserves are never needed
D speculation becomes impossible

21. The terms of trade measure

A export prices relative to import prices
B exports minus imports
C GDP divided by population
D the exchange rate multiplied by inflation

22. Terms of trade are commonly calculated as

A index of export prices / index of import prices × 100
B index of import prices / index of export prices × 100
C exports / imports × 100 only in volume terms
D current account / capital account × 100

23. If export price index is 120 and import price index is 100, the terms of trade are

A 83.3
B 100
C 120
D 220

24. If export price index is 90 and import price index is 120, the terms of trade are

A 75
B 90
C 120
D 210

25. An improvement in the terms of trade means

A export prices rise relative to import prices
B import prices rise relative to export prices
C export volume must fall to zero
D the current account must improve automatically

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. An improvement in terms of trade may worsen the current account if

A demand for exports is price elastic and export volume falls significantly
B demand for exports is perfectly inelastic
C import spending must fall
D export revenue must rise in all cases

27. Comparative advantage exists when a country can produce a good

A at a lower opportunity cost than another country
B using fewer resources absolutely in every good
C with no scarce resources
D only when it has a trade surplus

28. Absolute advantage exists when a country can produce a good

A using fewer resources than another country
B at a higher opportunity cost
C only with tariffs
D only with no imports

29. Country A can produce 10 cars or 20 computers. Country B can produce 6 cars or 18 computers. Which statement is correct?

A A has comparative advantage in cars; B has comparative advantage in computers
B A has comparative advantage in computers; B has comparative advantage in cars
C A has comparative advantage in both goods
D B has absolute advantage in both goods

30. Country X can produce 40 wheat or 20 cloth. Country Y can produce 30 wheat or 10 cloth. Which statement is correct?

A X has comparative advantage in cloth; Y has comparative advantage in wheat
B X has comparative advantage in wheat; Y has comparative advantage in cloth
C X has no absolute advantage
D Y has comparative advantage in both goods

31. The main gain from specialisation based on comparative advantage is

A higher total world output
B complete removal of scarcity
C equal income distribution automatically
D elimination of all unemployment permanently

32. Protectionism means

A government restrictions on trade to protect domestic producers
B complete removal of tariffs and quotas
C unrestricted free trade
D specialisation according to comparative advantage only

33. A tariff is

A a tax on imports
B a physical limit on imports
C a complete ban on imports
D a subsidy to foreign firms

34. An import quota is

A a limit on the quantity of imports
B a tax on exports
C a fall in the exchange rate
D a payment to domestic consumers

35. Which argument supports protectionism?

A infant industries may need time to develop economies of scale
B consumers always pay lower prices under tariffs
C protectionism always improves global efficiency
D foreign retaliation is impossible

36. Which is a cost of protectionism?

A higher prices and reduced choice for consumers
B lower domestic producer profits always
C greater allocative efficiency automatically
D lower government tariff revenue in every case

37. A tariff on imported steel is likely to

A raise domestic steel prices and protect domestic steel producers
B reduce domestic steel prices immediately
C increase foreign steel competition
D remove government revenue

38. A quota differs from a tariff because a quota

A directly restricts import quantity
B raises government revenue automatically like a tax
C lowers import prices
D removes scarcity

39. Globalisation is best defined as

A increasing integration and interdependence of economies
B complete economic isolation of countries
C elimination of all multinational companies
D production only for domestic markets

40. Which factor has most encouraged globalisation?

A improvements in transport, communication and trade liberalisation
B higher trade barriers everywhere
C banning foreign direct investment
D rising costs of communication

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A multinational company is a firm that

A operates production or business activities in more than one country
B sells only in one domestic village
C is always owned by a government
D never invests abroad

42. A possible benefit of MNCs to a host developing economy is

A employment creation and technology transfer
B guaranteed elimination of pollution
C no repatriation of profits
D automatic equal income distribution

43. A possible cost of MNCs to a host economy is

A profit repatriation and possible exploitation of weak regulation
B zero job creation
C no pressure on domestic firms
D automatic current account surplus

44. The Human Development Index includes

A life expectancy, education and income per head
B inflation, unemployment and exchange rate
C exports, imports and interest rates
D birth rate, death rate and tariffs only

45. Which is not directly included in HDI?

A inflation rate
B life expectancy
C years of schooling
D GNI per head

46. A country may have high GDP per head but lower development if

A income is unequally distributed and health/education outcomes are weak
B HDI is automatically equal to GDP per head
C everyone has equal access to healthcare
D life expectancy is very high and poverty is zero

47. Foreign aid is

A transfer of resources from one country or organisation to another, often to support development
B a tax on imports
C a loan from households to domestic firms
D a fall in government spending

48. Which is a possible benefit of aid?

A financing infrastructure, healthcare and education where domestic saving is low
B guaranteed absence of corruption
C permanent independence from donors
D automatic elimination of debt

49. Which is a possible disadvantage of aid?

A dependency and misuse of funds
B immediate rise in domestic saving always
C no political conditions ever
D guaranteed efficient allocation

50. Which chain is most accurate?

A comparative advantage → specialisation → higher world output → trade can increase consumption possibilities
B protectionism → lower import prices → greater consumer choice → higher global efficiency always
C depreciation → imports cheaper → current account improves immediately in all cases
D MNC entry → no profit repatriation → zero external costs → HDI automatically maximised

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: A

A correct: the current account records trade in goods/services, primary income and secondary income.
B wrong: government tax revenue is fiscal data.
C wrong: bank lending and borrowing are financial flows, not current account trade/income flows.
D wrong: unemployment is a labour-market indicator.

2. Answer: A

A correct: current account deficit means payments to other countries exceed receipts from other countries.
B wrong: receipts exceeding payments is a surplus.
C wrong: exports greater than imports would improve the goods balance.
D wrong: government revenue exceeding spending is a budget surplus.

3. Answer: B

A wrong: imports and income outflows exceeding inflows suggest a deficit.
B correct: current account surplus occurs when receipts exceed payments.
C wrong: government spending exceeding tax revenue is a budget deficit.
D wrong: capital flows are not the current account.

4. Answer: A

A correct: exports bring money into the country, so they are credit items.
B wrong: importing services involves payment abroad, so debit.
C wrong: paying dividends to foreign shareholders is an income outflow, so debit.
D wrong: aid sent abroad is a transfer outflow, so debit.

5. Answer: C

A wrong: exporting financial services brings money in, so credit.
B wrong: foreign tourists spending domestically is a service export, so credit.
C correct: imports of machinery require payment abroad, so debit.
D wrong: profits received from overseas are primary income inflows, so credit.

6. Answer: B

A wrong: imports exceed exports, so there is no surplus.
B correct: goods balance = exports – imports = $400bn – $520bn = -$120bn, a deficit.
C wrong: deficit is not $400bn.
D wrong: $920bn adds exports and imports.

7. Answer: A

A correct: current account = -80 + 50 – 20 + 10 = -$40bn.
B wrong: sign is negative, not positive.
C wrong: -$140bn misadds the balances.
D wrong: +$60bn ignores negative items.

8. Answer: A

A correct: low competitiveness reduces exports and may increase import demand, causing deficits.
B wrong: high export growth improves the current account.
C wrong: undervaluation usually improves competitiveness.
D wrong: high saving and low consumption usually reduce imports.

9. Answer: A

A correct: depreciation can improve the current account if export and import demand are sufficiently price elastic.
B wrong: higher domestic inflation reduces competitiveness.
C wrong: lower foreign income reduces export demand.
D wrong: more import spending worsens the deficit.

10. Answer: A

A correct: Marshall-Lerner says depreciation improves the current account if PEDx + PEDm > 1.
B wrong: if the sum is less than 1, depreciation may worsen the current account.
C wrong: perfectly inelastic trade demand prevents improvement.
D wrong: zero inflation is not the condition.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: A

A correct: after depreciation, import values may rise before quantities adjust, so the current account worsens first and improves later.
B wrong: the J-curve does not mean permanent worsening after initial improvement.
C wrong: it changes over time.
D wrong: depreciation makes imports dearer, not cheaper.

12. Answer: A

A correct: contracts, habits and production capacity mean export/import quantities adjust slowly.
B wrong: import prices rise after depreciation.
C wrong: exports become cheaper abroad.
D wrong: demand elasticity does not instantly become perfect.

13. Answer: A

A correct: appreciation raises foreign-currency price of exports and lowers domestic-currency price of imports.
B wrong: that describes depreciation.
C wrong: appreciation usually reduces export competitiveness.
D wrong: appreciation can reduce imported inflation.

14. Answer: A

A correct: depreciation lowers foreign-currency export prices and raises domestic-currency import prices.
B wrong: that describes appreciation.
C wrong: import prices rise after depreciation.
D wrong: depreciation can increase inflation through import costs.

15. Answer: A

A correct: floating exchange rates are determined by currency demand and supply.
B wrong: permanent government fixing is a fixed exchange rate.
C wrong: unemployment may affect confidence but does not alone determine the rate.
D wrong: gold reserves alone do not determine a floating rate.

16. Answer: A

A correct: higher interest rates attract financial inflows, increasing demand for the currency.
B wrong: lower export demand reduces currency demand.
C wrong: higher inflation weakens competitiveness and may depreciate the currency.
D wrong: capital flight increases currency supply and reduces demand.

17. Answer: A

A correct: loss of confidence causes investors to sell the currency, causing depreciation.
B wrong: higher export demand increases demand for the currency.
C wrong: higher interest rates attract inflows and may appreciate the currency.
D wrong: FDI inflows increase currency demand.

18. Answer: A

A correct: fixed rates require central bank intervention to maintain the peg.
B wrong: free movement is floating exchange rate.
C wrong: foreign reserves are needed to defend the peg.
D wrong: fixed rates do not stop trade.

19. Answer: A

A correct: buying its own currency raises demand and supports its value.
B wrong: selling its own currency increases supply and pushes it down.
C wrong: lower interest rates may cause capital outflows and weaken the currency.
D wrong: higher imports increase currency supply and can weaken it.

20. Answer: A

A correct: defending a fixed exchange rate may force interest-rate or reserve policies that limit monetary independence.
B wrong: fixed rates aim to reduce exchange-rate uncertainty.
C wrong: reserves are often needed.
D wrong: speculation can still occur, especially if the peg seems unsustainable.

21. Answer: A

A correct: terms of trade measure export prices relative to import prices.
B wrong: exports minus imports is trade balance.
C wrong: GDP/population is GDP per head.
D wrong: exchange rate × inflation is not terms of trade.

22. Answer: A

A correct: terms of trade = export price index / import price index × 100.
B wrong: this reverses the formula.
C wrong: terms of trade compare prices, not export/import volumes.
D wrong: current account/capital account is not the formula.

23. Answer: C

A wrong: 83.3 reverses the formula.
B wrong: 100 would mean unchanged relative prices.
C correct: 120/100 × 100 = 120.
D wrong: 220 adds the indices.

24. Answer: A

A correct: 90/120 × 100 = 75.
B wrong: 90 is the export price index only.
C wrong: 120 is the import price index only.
D wrong: 210 adds the indices.

25. Answer: A

A correct: improvement means export prices rise relative to import prices, so each unit of exports buys more imports.
B wrong: import prices rising relative to export prices is deterioration.
C wrong: export volume does not have to fall to zero.
D wrong: current account may improve or worsen depending on elasticities.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: if export prices rise and demand is elastic, export volume may fall enough to reduce export revenue.
B wrong: perfectly inelastic export demand would keep quantity stable and may raise revenue.
C wrong: import spending does not have to fall.
D wrong: export revenue does not always rise.

27. Answer: A

A correct: comparative advantage means producing at lower opportunity cost.
B wrong: using fewer resources is absolute advantage.
C wrong: scarcity still exists.
D wrong: a trade surplus is not required.

28. Answer: A

A correct: absolute advantage means producing with fewer resources or higher productivity.
B wrong: higher opportunity cost is not advantage.
C wrong: tariffs are unrelated.
D wrong: imports do not prevent absolute advantage.

29. Answer: A

A correct: A’s opportunity cost of 1 car = 2 computers; B’s opportunity cost of 1 car = 3 computers, so A has comparative advantage in cars. A’s opportunity cost of 1 computer = 0.5 cars; B’s = 0.33 cars, so B has comparative advantage in computers.
B wrong: it reverses the opportunity costs.
C wrong: one country cannot have comparative advantage in both goods in a two-good model.
D wrong: A has absolute advantage in both goods.

30. Answer: A

A correct: X’s opportunity cost of 1 cloth = 2 wheat; Y’s = 3 wheat, so X has comparative advantage in cloth. X’s opportunity cost of 1 wheat = 0.5 cloth; Y’s = 0.33 cloth, so Y has comparative advantage in wheat.
B wrong: it reverses comparative advantage.
C wrong: X has absolute advantage in both goods.
D wrong: one country cannot have comparative advantage in both goods in a two-good model.

31. Answer: A

A correct: specialisation by comparative advantage increases total world output and consumption possibilities.
B wrong: scarcity remains.
C wrong: trade does not automatically equalise income distribution.
D wrong: unemployment is not permanently eliminated.

32. Answer: A

A correct: protectionism means restricting trade to protect domestic producers.
B wrong: removing barriers is free trade.
C wrong: unrestricted free trade is the opposite of protectionism.
D wrong: comparative advantage supports free trade, not protectionism.

33. Answer: A

A correct: tariff is a tax on imports.
B wrong: physical limit is quota.
C wrong: complete ban is embargo.
D wrong: subsidy to foreign firms is not a tariff.

34. Answer: A

A correct: import quota directly limits the quantity of imports.
B wrong: tax on exports is an export tax.
C wrong: fall in exchange rate is depreciation.
D wrong: payment to consumers is a subsidy/transfer.

35. Answer: A

A correct: infant industries may need temporary protection to grow and gain economies of scale.
B wrong: tariffs usually raise consumer prices.
C wrong: protectionism can reduce global efficiency.
D wrong: retaliation is possible.

36. Answer: A

A correct: trade barriers often raise prices and reduce choice.
B wrong: domestic producer profits may rise due to protection.
C wrong: allocative efficiency usually falls.
D wrong: tariffs may increase government revenue.

37. Answer: A

A correct: tariff raises import prices, allowing domestic steel producers to compete more easily.
B wrong: tariffs raise, not reduce, domestic prices.
C wrong: foreign competition is reduced.
D wrong: tariffs can raise government revenue.

38. Answer: A

A correct: a quota directly limits import quantity, while a tariff raises import price through tax.
B wrong: quotas do not automatically raise government revenue unless licences are sold.
C wrong: quotas do not lower import prices.
D wrong: scarcity remains.

39. Answer: A

A correct: globalisation means economies becoming increasingly connected through trade, investment, migration and technology.
B wrong: isolation is the opposite.
C wrong: MNCs are major drivers of globalisation.
D wrong: globalisation expands beyond domestic markets.

40. Answer: A

A correct: cheaper transport, faster communication and trade liberalisation have increased global integration.
B wrong: higher barriers reduce globalisation.
C wrong: banning FDI reduces globalisation.
D wrong: communication costs have generally fallen, encouraging globalisation.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Answer: A

A correct: an MNC operates in more than one country.
B wrong: selling only in one village is not multinational.
C wrong: MNCs can be privately owned.
D wrong: MNCs often invest abroad.

42. Answer: A

A correct: MNCs may create jobs, bring capital and transfer technology/skills.
B wrong: pollution is not guaranteed to disappear.
C wrong: profits may be repatriated.
D wrong: income distribution does not automatically become equal.

43. Answer: A

A correct: MNCs may send profits home and exploit weak labour/environmental regulation.
B wrong: jobs may be created.
C wrong: domestic firms may face strong pressure.
D wrong: current account surplus is not automatic.

44. Answer: A

A correct: HDI includes life expectancy, education and GNI per head.
B wrong: inflation, unemployment and exchange rate are not HDI components.
C wrong: trade and interest rates are not direct HDI components.
D wrong: birth/death rates and tariffs are not the HDI formula.

45. Answer: A

A correct: inflation rate is not directly included in HDI.
B wrong: life expectancy is included.
C wrong: schooling/education is included.
D wrong: GNI per head is included.

46. Answer: A

A correct: high GDP per head may hide inequality and poor health/education outcomes.
B wrong: HDI is broader than GDP per head.
C wrong: equal healthcare access would support development.
D wrong: high life expectancy and zero poverty would strengthen development.

47. Answer: A

A correct: aid is a transfer of resources, money, goods, expertise or loans/grants to support another country.
B wrong: tax on imports is tariff.
C wrong: household loan to domestic firms is not foreign aid.
D wrong: fall in government spending is fiscal contraction.

48. Answer: A

A correct: aid can finance development projects when domestic savings or tax revenue are low.
B wrong: corruption is not guaranteed absent.
C wrong: aid can create donor dependency.
D wrong: debt is not automatically eliminated.

49. Answer: A

A correct: aid may create dependency, be misused, or be tied to donor interests.
B wrong: domestic saving does not always rise immediately.
C wrong: aid may come with political/economic conditions.
D wrong: efficient allocation is not guaranteed.

50. Answer: A

A correct: comparative advantage encourages specialisation, increasing world output and consumption possibilities through trade.
B wrong: protectionism usually raises import prices and reduces choice/efficiency.
C wrong: depreciation makes imports dearer, and current account improvement depends on elasticities and time.
D wrong: MNCs may repatriate profits, create external costs, and HDI is not automatically maximised.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.