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Difficulty: HardForeign Trade Types and Balance of Payments

A country's annual foreign economic statistics record visible exports of 150millionandvisibleimportsof150 million and visible imports of 180 million. During the same period, foreign shipping and insurance services rendered by domestic firms earned 25million,overseastourismexpenditurebydomesticresidentstotaled25 million, overseas tourism expenditure by domestic residents totaled 10 million, and net unrequited transfers received from abroad amounted to $5 million. Based on these transaction figures, what is the country's overall Current Account balance?

  1. A deficit of $10 millionAnswer
  2. B
    A deficit of $30 million
  3. C
    A surplus of $10 million
  4. D
    A surplus of $20 million

Answer

A deficit of $10 million
The Current Account balance combines visible trade (Balance of Trade) and invisible trade (services, income, and transfers). Subtracting visible imports (180million)fromvisibleexports(180 million) from visible exports ( 150 million) yields a visible trade deficit of 30million.Addingthenetinvisiblebalanceof+30 million. Adding the net invisible balance of + 20 million (25millionincome−25 million income - 10 million tourism expenditure + 5milliontransfers)resultsinanoverallCurrentAccountdeficitof5 million transfers) results in an overall Current Account deficit of 10 million.

Step-by-Step Solution

1
Calculate the Balance of Trade (visible trade balance)
Balance of Trade=$150 million (visible exports)−$180 million (visible imports)=−$30 million\text{Balance of Trade} = \$150\text{ million (visible exports)} - \$180\text{ million (visible imports)} = -\$30\text{ million}
Balance of Trade measures the difference between visible merchandise exports and visible merchandise imports.
2
Calculate the Net Invisible Balance (services and transfers)
Net Invisibles=+$25 million (services sold)−$10 million (services bought)+$5 million (transfers)=+$20 million\text{Net Invisibles} = +\$25\text{ million (services sold)} - \$10\text{ million (services bought)} + \$5\text{ million (transfers)} = +\$20\text{ million}
Invisible items include trade in services (freight, insurance, tourism) and unrequited current transfers.
3
Compute the overall Current Account balance
Current Account Balance=−$30 million+$20 million=−$10 million\text{Current Account Balance} = -\$30\text{ million} + \$20\text{ million} = -\$10\text{ million}
The Current Account aggregates both the visible Balance of Trade and net invisible transactions.

Key Concept

Current Account Balance Accounting
Estimated Time:2m 0s
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Topics

Foreign Trade Types and Balance of Payments

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