A potentially tricky BoP question

The 2018 NSW Economics HSC exam was full of challenging multiple choice questions. Here’s one that involves the Balance of Payments (BoP).

Check out the question below:

Let’s consider what we’ve got. From the question we know that we need to focus on Australia’s BoP, not the foreign country (whoever it is).

First bit of info: an Australian company purchases a foreign company.

This involves funds leaving Australia. And because it involves the purchase of a foreign company, this is likely to be a large amount of money. And and because it involves the purchase of a whole company, it is going to be classified as foreign direct investment (FDI).

FDI is recorded on the financial account. Therefore, this first bit of info would be recorded as a debit on the financial account.

Second bit of info: this foreign company then pays dividends to Australian shareholders.

Dividends are classified as an income flow. This means they are recorded on the current account, under primary income. If the dividends are paid to Australian shareholders, this represents an inflow (or credit) to Australia’s current account.

Then, this second bit of info would be recorded as a credit on the current account.

Our answer is A.

My working out process. See suggestions below.

My recommendation

Exams can be tricky situations. It can be easy to get the answer categories mixed up. I’d suggest working through the question first, putting your thinking down on paper, and THEN looking at the answer categories.

This way, you’ll know what you’re looking for and might be less likely to get tricked.