Foreign investors buy Australian bonds worth $100 (Australian dollars) and receive a dividend worth $10 (Australian dollar). In Australia's balance of payments,

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BlackTom AI · Accepted Answer

When analyzing how foreign transactions are recorded in Australia's balance of payments, it helps to separate financial transactions from income flows.
Option a: 'purchase of bonds will be recorded in the capital account and dividends will be recorded in the capital/financial account' This is incorrect because the purchase of financial assets (bonds) by foreigners is a financial/capital flow, not a current account item; dividends are typically recorded as income, not as a capital/financial flow, so splitting them this way misclassifies the income component.
Option b: 'purchase of bonds will be recorded in the current account and dividends will be recorded in the capital/financial account' This reverses the standard treatment. The current account covers trade in goods and services and income flows, but not the gross purchase of financial assets. The purchase of bonds is a capital/financial transaction, so this option misclassifies the bond purchase and misallocates dividends.
Option c: 'purchase of bonds will be recorded in the current account and dividends will be recorded in the current account' This is incorrect because the current account includes trade in goods/services and income receipts/payments, but the acquisition of financial assets by foreigners is not part of the current account; dividends are indeed income, but the bond purchase belongs to the financial/ capital account, making this option inconsistent.
Option d: 'purchase of bonds will be recorded in the capital/financial account and dividends will be recorded in the current account' This aligns with the standard BOP convention: the capital/financial account records cross-border ownership of financial assets (like bonds) and flows related to these assets, while the current account records incomes such as dividends received by residents from foreign investments, i.e., dividend receipts are income and appear in the current account. The dollar values given (100 for the bond purchase and 10 for the dividend) are both external transactions but belong to different BOP components as described, so this option correctly classifies each item.

Foreign investors buy Australian bonds worth $100 (Australian dollars) and receive a dividend worth $10 (Australian dollar). In Australia's balance of payments,

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