These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD), and its fictional trading partner Kestria, whose currency is the kesta (KS). All figures are fictional and in billions of valdas (VD bn). The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Assumptions: every transaction is recorded, so CA + CFA = 0; a four-function calculator is enough.
Question 1 (multiple choice · foundation)
Which of the following transactions is recorded in Valdoria’s current account?
- (A) A Valdorian bank buys bonds issued by the Kestrian government.
- (B) A Kestrian company builds a new warehouse in Valdoria.
- (C) A Valdorian engineer working in Kestria sends money to her family in Valdoria.
- (D) A Kestrian investor buys shares in a Valdorian mining company.
Answer and explanation
Answer: (C). Money sent home to family is a one-way payment (a remittance). It is a unilateral transfer, which is part of the current account, recorded as a credit for Valdoria.
- (A) is a purchase of a foreign financial asset: a CFA entry (debit for Valdoria).
- (B) is foreign direct investment in Valdoria, a purchase of a real asset: a CFA entry (credit).
- (D) is a foreign purchase of a Valdorian financial asset: a CFA entry (credit).
Question 2 (multiple choice · core)
In one year Valdoria’s exports of goods and services are 90, its imports of goods and services are 110, its net income from abroad is +8 and its net unilateral transfers are −5. What is Valdoria’s current account balance?
- (A) −7
- (B) −17
- (C) −20
- (D) −33
Answer and explanation
Answer: (B). Net exports = 90 − 110 = −20. CA = −20 + 8 + (−5) = −17.
- (A) treats the transfers as +5: −20 + 8 + 5 = −7. The question gives net transfers as −5.
- (C) is the balance of trade only. The CA also includes net income and net transfers.
- (D) subtracts both other items: −20 − 8 − 5 = −33. Net income is +8, so it is added.
Question 3 (multiple choice · core)
Valdoria has a current account deficit of VD 40 bn. Assuming all transactions are recorded, which statement is correct?
- (A) The CFA has a deficit of VD 40 bn, a net financial capital outflow.
- (B) The CFA has a surplus of VD 40 bn, a net financial capital inflow.
- (C) The CFA must be zero, because the balance of payments always balances.
- (D) The CFA cannot be found without knowing Valdoria’s exports and imports.
Answer and explanation
Answer: (B). CA + CFA = 0, so CFA = −(−40) = +40. On balance, foreigners bought VD 40 bn more Valdorian assets than Valdorians bought abroad: a net inflow.
- (A) gives the right size but the wrong sign. Two deficits cannot add to zero.
- (C) confuses the whole BOP with one account. Only the total CA + CFA is zero.
- (D) is wrong because the CA total already contains the trade figures; the CFA follows from CA + CFA = 0.
Question 4 (multiple choice · core)
A Valdorian pension fund buys VD 3 bn of shares in Kestrian companies. How is this recorded in Valdoria’s balance of payments?
- (A) As a credit in the capital and financial account, because Valdoria gains an asset.
- (B) As a debit in the capital and financial account, because money flows out of Valdoria.
- (C) As an import in the current account, because Valdoria is buying from Kestria.
- (D) As a debit under net income from abroad, because the pension fund pays Kestrians.
Answer and explanation
Answer: (B). Buying a foreign asset is a CFA transaction. A Valdorian pays foreigners, so money flows out: a debit (a financial capital outflow).
- (A) uses “gaining an asset” instead of the direction of the money. Money leaves Valdoria, so it is a debit.
- (C) treats shares as goods or services. Imports are goods and services; assets go in the CFA.
- (D) confuses buying an asset with paying income. The dividends the shares pay later will appear in net income from abroad, as credits for Valdoria.
Question 5 (calculation · core)
Valdoria’s international transactions for one year are shown below (VD bn).
| Transaction | VD bn |
|---|---|
| Exports of goods | 140 |
| Exports of services | 35 |
| Imports of goods | 120 |
| Imports of services | 30 |
| Investment income received from abroad | 12 |
| Investment income paid to foreign owners | 20 |
| Foreign aid received by Valdoria | 2 |
| Remittances sent home by foreign workers in Valdoria | 9 |
| Foreign purchases of Valdorian assets | 44 |
| Valdorian purchases of foreign assets | 54 |
(a) Calculate the balance of trade. (b) Calculate the current account balance. State whether it is a surplus or a deficit. (c) Calculate the capital and financial account balance. State whether there is a net financial capital inflow or outflow. (d) Show that the balance of payments is zero.
Worked solution
(a) Exports = 140 + 35 = 175. Imports = 120 + 30 = 150. Balance of trade = 175 − 150 = +25 (a trade surplus).
(b) Net income = 12 − 20 = −8. Net transfers = 2 − 9 = −7. CA = 25 − 8 − 7 = +10: a current account surplus.
(c) CFA = 44 − 54 = −10: a deficit, so a net financial capital outflow.
(d) CA + CFA = 10 + (−10) = 0. Alternative check: credits = 140 + 35 + 12 + 2 + 44 = 233; debits = 120 + 30 + 20 + 9 + 54 = 233.
Suggested mark points (4): 1 for +25; 1 for +10 with “surplus”; 1 for −10 with “outflow”; 1 for showing the sum is zero (either method). Carry forward an earlier error if the later steps are correct.
Question 6 (constructed response · core)
(a) For each transaction, identify the account (CA or CFA) and whether it is a credit or a debit for Valdoria. (i) A Kestrian airline pays a Valdorian firm to service its aircraft. (ii) Valdoria’s government gives VD 1 bn of emergency aid to Kestria. (iii) A Kestrian bank lends VD 5 bn to a Valdorian electricity company. (iv) Valdorian households receive dividends on shares they own in Kestrian firms. (b) Explain why the dividends in (a)(iv) are not recorded in the same account as the purchase of the shares. (c) Suppose foreign purchases of Valdorian assets rise by VD 15 bn and Valdorian purchases of foreign assets do not change. What must happen to Valdoria’s current account balance? Explain.
Worked solution and suggested Marlbridge rubric
(a)
- (i) CA, credit: an export of a service (money flows into Valdoria).
- (ii) CA, debit: a unilateral transfer sent abroad.
- (iii) CFA, credit: a loan from abroad is a financial capital inflow (Kestria acquires a claim on a Valdorian firm).
- (iv) CA, credit: net income from abroad.
(b) Buying the shares is a purchase of an asset between countries, which belongs in the CFA. The dividends are income earned on that asset, which belongs in the CA under net income from abroad. The purchase happens once; the income is earned over time.
(c) The CFA rises by VD 15 bn. Because CA + CFA = 0, the CA must fall by VD 15 bn (move towards deficit). The extra valdas foreigners spend on Valdorian assets are matched by extra spending by Valdoria abroad, for example more imports of goods and services.
| Point | What earns it |
|---|---|
| 1 | (i) and (ii) both correct (account and credit/debit) |
| 1 | (iii) and (iv) both correct |
| 1 | (b) distinguishes the asset purchase (CFA) from the income it earns (CA) |
| 1 | (c) CA falls by VD 15 bn (towards deficit) |
| 1 | (c) justified with CA + CFA = 0 |
In (c), “the CA changes” without a direction does not earn the fourth point.
Question 7 (constructed response · stretch)
In one year Valdoria’s net exports are −50, its net income from abroad is +6 and its net unilateral transfers are −4. Valdorian purchases of foreign assets are 30. One CFA figure is missing.
(a) Calculate the current account balance. (b) Calculate foreign purchases of Valdorian assets. (c) Valdoria runs current account deficits like this for many years. Explain how Valdoria pays for these deficits. (d) Explain how these years of deficits could affect Valdoria’s net income from abroad in the future, and so its future current account.
Model answer and suggested Marlbridge rubric
(a) CA = −50 + 6 − 4 = −48.
(b) CFA = −CA = +48. CFA = foreign purchases − 30 = 48, so foreign purchases of Valdorian assets = 78.
(c) Each year Valdoria spends more on imports, income payments and transfers than it earns abroad. It pays for the gap by selling assets to foreigners or borrowing from them (a CFA surplus, a net financial capital inflow of VD 48 bn this year).
(d) As foreigners build up more Valdorian shares, bonds and loans, Valdoria must pay them more interest, dividends and profits each year. These are debits in net income from abroad, so net income from abroad falls (becomes more negative). Other things equal, that makes the current account deficit larger in future years.
| Point | What earns it |
|---|---|
| 1 | CA = −48 |
| 1 | Foreign purchases = 78, using CA + CFA = 0 |
| 1 | (c) deficits paid for by selling assets to or borrowing from foreigners (CFA surplus) |
| 1 | (d) more foreign-owned assets mean more income paid abroad, so net income from abroad falls |
| 1 | (d) links the fall in net income to a larger future CA deficit |
Accept (b) found from credits = debits. In (c), “borrowing” alone earns the point if it is clear the lenders are foreign.
How did you do?
- Q1, Q4 or Q6(a) wrong: re-read “The current account (CA)”, “The capital and financial account (CFA)” and Worked example 2 in the study guide.
- Q2 or Q5 wrong: redo Worked example 1, writing every item with its sign.
- Q3, Q6(c) or Q7(a)–(b) wrong: revisit “Why CA + CFA = 0” and Worked example 3.
- Q6(b) or Q7(d) wrong: check the difference between buying an asset (CFA) and the income it earns (CA).
Then tick off the topic checklist.