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Difficulty: HardBalance of Trade and Structure of Balance of Payments

The table below details the international economic transactions recorded for a country in a financial year:

Transaction ItemValue ($ Million)
Export of merchandise goods450
Import of merchandise goods600
Shipping and insurance receipts110
Foreign tourism expenditure by citizens70
Foreign direct investment inflow150
Net unrequited transfers received30

Based on the data provided, what is the country's Current Account balance for the year?

  1. Deficit of $80 millionAnswer
  2. B
    Surplus of $70 million
  3. C
    Deficit of $150 million
  4. D
    Deficit of $110 million

Answer

Deficit of $80 million
The Current Account of the Balance of Payments consists of three primary components: visible merchandise trade, invisible trade (services), and net unrequited transfers. Calculating each gives: Visible Balance = 450m−450m - 600m = -150m;InvisibleBalance=150m; Invisible Balance = 110m - 70m=+70m = + 40m; Net Transfers = +30m.Addingthesetogether:−30m. Adding these together: - 150m + 40m+40m + 30m = -80m(adeficitof80m (a deficit of 80 million). Foreign direct investment is excluded as it belongs in the financial account.

Step-by-Step Solution

1
Calculate the Balance of Visible Trade (Merchandise Trade Balance)
Export of merchandise (450million)−Importofmerchandise(450 million) - Import of merchandise ( 600 million) = -150million(Deficitof150 million (Deficit of 150 million)
Visible trade includes only physical goods exported and imported.
2
Calculate the Balance of Invisible Trade (Services Balance)
Shipping and insurance receipts (110million)−Tourismexpenditureabroad(110 million) - Tourism expenditure abroad ( 70 million) = +40million(Surplusof40 million (Surplus of 40 million)
Invisible trade accounts for service receipts and service payments.
3
Sum all Current Account components (Visible Trade + Invisible Trade + Net Transfers)
-150million+150 million + 40 million + 30million=−30 million = - 80 million (Deficit of $80 million)
The Current Account consists of merchandise trade, services, and net unilateral transfers. Capital flows such as foreign direct investment belong exclusively to the financial/capital account.

Key Concept

Structure of the Balance of Payments Current Account
Estimated Time:2m 0s
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Topics

Balance of Trade and Structure of Balance of Payments

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