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Difficulty: HardForeign Trade Types and Balance of Payments

The foreign trade transactions of a country for a specific fiscal year are presented below:

ItemValue ($ million)
Visible merchandise exports620
Freight and insurance paid to foreign shipping lines85
Visible merchandise imports480
Banking and financial service fees received from abroad110
Foreign direct investment inflows150

Based on the statement above, what is the country's Balance of Trade position?

  1. A surplus of $140 million\$140\text{ million}Answer
  2. B
    A surplus of $165 million\$165\text{ million}
  3. C
    A surplus of $315 million\$315\text{ million}
  4. D
    A deficit of $140 million\$140\text{ million}

Answer

A surplus of $140 million\$140\text{ million}
The Balance of Trade (BOT) is defined strictly as the difference between the monetary value of a nation's visible exports and visible imports over a given period. Subtracting visible merchandise imports ($480 million\$480\text{ million}) from visible merchandise exports ($620 million\$620\text{ million}) gives a favorable balance (surplus) of $140 million\$140\text{ million}. Freight charges, banking services, and investment inflows are excluded from BOT.

Step-by-Step Solution

1
Identify the relevant trade items required to calculate the Balance of Trade.
Visible merchandise exports = $620 million\$620\text{ million}; Visible merchandise imports = $480 million\$480\text{ million}. Invisible trade services and capital account movements are excluded.
The Balance of Trade (BOT) measures exclusively the net trade value of physical/visible goods.
2
Apply the Balance of Trade formula: Balance of Trade=Visible Exports−Visible Imports\text{Balance of Trade} = \text{Visible Exports} - \text{Visible Imports}.
BOT=$620 million−$480 million=+$140 million\text{BOT} = \$620\text{ million} - \$480\text{ million} = +\$140\text{ million}.
Subtracting visible imports from visible exports yields a positive balance (surplus) of $140 million\$140\text{ million}.

Key Concept

Balance of Trade vs Balance of Payments
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Topics

Foreign Trade Types and Balance of Payments

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