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Question

Difficulty: EasyBalance of Trade and Structure of Balance of Payments

Match each of the following Balance of Payments transaction items with its correct account classification.

  • Export of crude oilVisible Trade Account (Current Account)
  • Payment for international freight servicesInvisible Trade Account (Current Account)
  • Foreign direct investment into domestic real estateCapital and Financial Account

Answer

Export of crude oil matches Visible Trade Account; Payment for international freight services matches Invisible Trade Account; Foreign direct investment into domestic real estate matches Capital and Financial Account.
Tangible merchandise like crude oil is recorded in the visible trade section of the current account. Services such as shipping and freight are intangibles recorded in the invisible trade section of the current account. Financial movements such as foreign direct investments involve capital asset creation and belong to the capital and financial account.

Step-by-Step Solution

1
Identify the nature of the transaction for Export of crude oil.
Crude oil is a physical, tangible commodity (merchandise).
Tangible exports and imports are classified as visible trade in the Current Account.
2
Identify the nature of the transaction for Freight services payment.
Shipping/freight is a service (intangible item).
Intangible service transactions are classified as invisible trade in the Current Account.
3
Identify the nature of Foreign direct investment.
FDI involves international capital movement and ownership of physical assets/capital.
Long-term investment flows and ownership of foreign assets belong to the Capital and Financial Account.

Key Concept

Structure of the Balance of Payments
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Topics

Balance of Trade and Structure of Balance of Payments

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