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Question

Difficulty: MediumTourism and Its Contributions to Trade

A country experiencing a persistent deficit in its visible trade account develops international eco-tourism projects and cultural heritage festivals to attract foreign visitors. How does this policy directly assist in improving the country's overall balance of payments position?

  1. It generates foreign currency receipts recorded as invisible export earnings.Answer
  2. B
    It converts service earnings into tangible merchandise export figures in the balance of trade.
  3. C
    It shifts commercial hospitality operations into non-commercial direct personal services.
  4. D
    It automatically reduces customs tariff rates applied to imported consumer goods.

Answer

It generates foreign currency receipts recorded as invisible export earnings.
When international tourists spend money within a host country on accommodation, transport, and recreation, foreign exchange flows into the country. Because these earnings stem from services rather than physical goods, they are classified as invisible exports, directly strengthening the current account of the balance of payments.

Step-by-Step Solution

1
Analyze how foreign tourist spending impacts host country transactions.
Foreign tourists spend money on accommodation, dining, guided tours, and local transport.
These expenditures represent payments by foreign residents for locally provided services.
2
Classify these service transactions within international trade accounting.
The foreign currency inflow is categorized under invisible exports in the current account of the balance of payments.
Although no physical merchandise is shipped abroad, providing services to non-residents earns foreign exchange that helps offset visible trade deficits.

Key Concept

Tourism as an Invisible Export in Balance of Payments
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Topics

Tourism and Its Contributions to Trade

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