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Difficulty: MediumBalance of Trade and Structure of Balance of Payments

An economy's external trade data for a given fiscal year is presented below:

• Exports of agricultural and manufactured goods: 620million•Importsofmachineryandrawmaterials:620 million • Imports of machinery and raw materials: 780 million
• Receipts from international shipping and banking services: 110million•Paymentsforforeigntourismandinsurance:110 million • Payments for foreign tourism and insurance: 60 million
• Inflow of foreign direct investment: $250 million

Based on the data provided, what is the economy's Balance of Trade?

  1. A deficit of $160 millionAnswer
  2. B
    A deficit of $110 million
  3. C
    A surplus of $140 million
  4. D
    A deficit of $210 million

Answer

A deficit of $160 million
The Balance of Trade (also known as the balance of visible trade or merchandise balance) calculates the difference between total physical goods exported and total physical goods imported. Subtracting visible imports (780million)fromvisibleexports(780 million) from visible exports ( 620 million) yields a deficit of $160 million. Services and capital movements are excluded from this specific component.

Step-by-Step Solution

1
Identify the relevant components of Balance of Trade
Visible exports = 620million;Visibleimports=620 million; Visible imports = 780 million
Balance of Trade (merchandise balance) only considers visible (physical) trade items.
2
Exclude non-visible trade and financial account entries
Services (110mreceipts,110m receipts, 60m payments) and Foreign Direct Investment ($250m) are excluded
Services belong to invisible trade in the Current Account, while Foreign Direct Investment belongs to the Capital and Financial Account.
3
Calculate the Balance of Trade
Balance of Trade = 620million−620 million - 780 million = -$160 million
Subtract visible imports from visible exports to get the net merchandise balance.

Key Concept

Balance of Trade calculation and distinction between visible trade, invisible trade, and financial account transactions.
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Topics

Balance of Trade and Structure of Balance of Payments

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