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Difficulty: MediumBalance of Trade and Structure of Balance of Payments

A nation's international economic transactions for a given fiscal year are recorded as follows:

• Merchandise exports: 450million•Merchandiseimports:450 million • Merchandise imports: 520 million
• Freight and shipping receipts: 60million•Investmentincomeearnedfromabroad:60 million • Investment income earned from abroad: 35 million

Based on the balance of payments structure, what is the country's balance of trade?

  1. A deficit of $70 millionAnswer
  2. B
    A deficit of $130 million
  3. C
    A deficit of $35 million
  4. D
    A surplus of $70 million

Answer

A deficit of $70 million
The balance of trade (or balance of visible trade) is calculated strictly as Merchandise Exports minus Merchandise Imports (450M−450M - 520M = -70M).Sinceimportsexceedexports,theresultisadeficitof70M). Since imports exceed exports, the result is a deficit of 70 million. Services such as shipping receipts and primary income like investment earnings are excluded because they form part of invisible trade within the broader current account.

Step-by-Step Solution

1
Identify the components of the Balance of Trade (Visible Balance)
Balance of Trade includes only tangible merchandise exports (450million)andmerchandiseimports(450 million) and merchandise imports ( 520 million). Invisible items like shipping receipts and investment income belong elsewhere in the current account.
By definition, the balance of trade measures the net value of visible goods exported and imported.
2
Apply the Balance of Trade formula
Balance of Trade = Visible Exports - Visible Imports = 450million−450 million - 520 million = -$70 million
Subtracting imports from exports yields a negative value, which represents a trade deficit.

Key Concept

Balance of Trade vs. Current Account Structure
Estimated Time:1m 0s
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Topics

Balance of Trade and Structure of Balance of Payments

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