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Difficulty: MediumForeign Trade Types and Balance of Payments

A country recorded the following international trade transactions in a given fiscal year:

- Export of agricultural produce: 120million−Exportofcrudeoil:120 million - Export of crude oil: 380 million
- Import of manufactured goods: 290million−Importofrefinedpetroleum:290 million - Import of refined petroleum: 110 million
- Freight and shipping charges paid to foreign companies: 45million−Financialandinsuranceservicesprovidedtooverseasclients:45 million - Financial and insurance services provided to overseas clients: 30 million

Based on the data provided, what is the country's Balance of Trade in millions of dollars?

Answer: 100 million dollars

Answer

The country's Balance of Trade is $100 million.
The Balance of Trade (BOT) is calculated strictly as the total value of visible exports minus the total value of visible imports. In this scenario, visible exports equal 120million+120 million + 380 million = 500million,whilevisibleimportsequal500 million, while visible imports equal 290 million + 110million=110 million = 400 million. Subtracting visible imports from visible exports (500M−500M - 400M) gives a positive Balance of Trade of $100 million. Freight charges and financial services are invisible trade items and must be excluded from Balance of Trade calculations.

Step-by-Step Solution

1
Calculate total visible exports
120million+120 million + 380 million = $500 million
Balance of Trade considers only physical (visible) goods exported out of the country.
2
Calculate total visible imports
290million+290 million + 110 million = $400 million
Balance of Trade considers only physical (visible) goods imported into the country.
3
Filter out invisible trade items
Freight charges (45M)andfinancialservices(45M) and financial services ( 30M) are excluded
Services and freight are invisible items which belong to the Current Account balance, not the Balance of Trade.
4
Subtract total visible imports from total visible exports
500million−500 million - 400 million = $100 million
Balance of Trade formula is Visible Exports minus Visible Imports.

Key Concept

Balance of Trade vs. Balance of Payments
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Topics

Foreign Trade Types and Balance of Payments

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