An Australian company buys and sets up a factory for production in Singapore, in which part of Australia’s Balance of Payments would this transaction be recorded?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Let’s break down what this question is asking and what each option implies. 
Option a: The current account, export good, credit. This would apply if the Australian company were exporting goods to another country and receiving payment, which would be recorded in the current account as a credit. However, establishing a factory abroad involves creating a capital asset, not an immediate export of goods. So this is inaccurate for the described transaction.
Option b: The financial account, portfolio investment, debit. Portfolio investment covers holdings like stocks and bonds, not direct ownership of a foreign facility. Since the Australia-based company is investing directly in a foreign subsidiary/factory, the correct category would be direct investment, not portfolio investment. Therefore this choice misclassifies the type of financial flow and is wrong.
Option c: The financial account, direct investment, debit. This option matches the scenario precisely: the Australian company makes a direct investment abroad by setting up a factory in Singapore. Direct investment is categorized in the financial account, and because this represents an outflow of funds to acquire a foreign asset, it is recorded as a debit. This aligns with standard balance of payments treatment for outward direct investment.
Option d: The financial account, direct investment, credit. As explained, a direct investment abroad is an outflow of capital from Australia, which is debited in the financial account. A credit would indicate an inflow of funds or a claim on foreign assets, which does not describe the described transaction. Hence this is incorrect.

An Australian company buys and sets up a factory for production in Singapore, in which part of Australia’s Balance of Payments would this transaction be recorded?[Fill in the blank]

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