If an Australian company sells insurance to a foreign company, how does this affect Australia's balance of payments? a. It increases exports of services. b. It increases imports of goods. c. It increases capital inflows. d. It lowers the balance on the current account.
Question
If an Australian company sells insurance to a foreign company, how does this affect Australia's balance of payments?
a. It increases exports of services.
b. It increases imports of goods.
c. It increases capital inflows.
d. It lowers the balance on the current account.
Solution
The correct answer is:
a. It increases exports of services.
Here's why:
The balance of payments is a record of all transactions between residents of a country and the rest of the world. It's divided into two main accounts: the current account and the capital account.
When an Australian company sells insurance to a foreign company, it is providing a service to the foreign company. In the balance of payments, this is recorded as an export of services, which is part of the current account. Therefore, this transaction would increase Australia's exports of services, improving the balance on the current account.
The other options are not correct because:
b. The transaction does not involve any physical goods, so it does not affect imports of goods.
c. The transaction is a trade in services, not a financial investment, so it does not affect capital inflows.
d. The transaction improves the balance on the current account, it does not lower it.
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