Open Economy: International Trade and Finance: three questions to try now
Real questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not AP Economics past-paper material.
Question 1
The introduction of the euro as the common currency of much of Western Europe created a powerful economic group. What is least likely to have been the intention?
Answer: D.
This is the least likely intention of introducing the euro as the common currency. The primary goal of the euro was to facilitate economic integration within the eurozone countries and promote internal trade and economic growth among the member states. The focus was on creating a larger and more stable single market through the elimination of currency exchange costs and fluctuations, which in turn was expected to lead to increased trade among eurozone countries.
Enhanced international trade with non-members was not the immediate goal of introducing the euro. While a stronger eurozone might indirectly benefit its members in their international trade relations, the main aim was to boost economic activity within the region itself. Additionally, the euro's impact on international trade with non-members could be influenced by various other factors such as global economic conditions, trade agreements, and competitiveness of the eurozone economies, rather than solely relying on the introduction of the euro as the common currency.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not AP Economics past-paper material.
Question 2
What is an example of primary income in the current account of the balance of payments of Pakistan?
Answer: C.
Primary income records cross-border returns to factors of production. Two conditions must both hold: the payment must be a return on land, labour or capital, and it must cross the border between a resident and a non-resident. Rent on an overseas property satisfies both, a Pakistani resident owns an asset abroad and receives income from foreign tenants, so foreign currency flows into Pakistan as a credit in the primary income account.
Why the other options are wrong:
- A is a dividend from a domestic firm. Both parties are Pakistani residents, so no cross-border transaction occurs and nothing enters the balance of payments at all.
- B is the profit of exporting businesses. The export sale itself is recorded in trade in goods; the profit is a domestic income, not a separate cross-border factor payment.
- D is a salary paid by a foreign-owned firm operating in Pakistan to a Pakistani engineer. This is the sharpest trap: the employer is foreign-owned, which makes the payment look international. But the firm's operation in Pakistan is treated as resident there, so a resident is paying a resident, a domestic transaction. Compensation of employees enters primary income only when the worker and employer are in different economies, for example a Pakistani engineer working abroad.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not AP Economics past-paper material.
Question 3
The African Union consists of 55 developing countries. They agree to adopt a free-trade model to boost trade between member countries.
In theory what do free-trade models tend to ignore?
Answer: D.
What this practice covers
These questions are drawn from past Cambridge papers, mapped across to this topic because the concept is the same. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on open economy: international trade and finance, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Not stating which currency's market the graph shows.
- Putting the wrong currency on the axes, or labelling the vertical axis "price" without units.
- Shifting demand when the correct answer is a shift in supply (or both).
- Using "devaluation" for a market-driven fall; that is depreciation.
- Forgetting that one currency's appreciation is another's depreciation.
- Placing FDI in the current account. Asset flows go in the financial account; the income they later generate goes in the current account.
- Using the nominal rather than the real interest rate to explain capital flows.
- Forgetting that only the relative interest rate matters.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Open Economy: International Trade and Finance revision notes.