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      Question

      In the context of the Balance of Payments (BOP), which

      transaction represents an entry in the Financial Account (Capital Account) that would be recorded as a credit (a positive sign)?
      A A foreign company purchases an existing domestic factory (Foreign Direct Investment - FDI). Correct Answer Incorrect Answer
      B A domestic resident receives dividend income from a foreign stock investment. Correct Answer Incorrect Answer
      C A domestic government makes an official foreign aid payment to a developing country. Correct Answer Incorrect Answer
      D A domestic firm pays interest on a loan from a foreign bank. Correct Answer Incorrect Answer

      Solution

      Solution: Β· The Financial Account tracks cross-border changes in asset ownership. Β· Credit (Positive) Entries represent a net inflow of funds or an increase in the country's liabilities to foreigners. o FDI Inflow: When a foreign entity (e.g., a company) buys a domestic asset (factory), money flows into the domestic economy. This is an increase in domestic liability (the factory is now owed to foreigners) and is recorded as a credit in the Financial Account. Β· Why others are incorrect: A (dividend income) is a Current Account Credit (Factor Income). B (foreign aid) is a Current Account Debit (Transfer). D (interest payment) is a Current Account Debit (Factor Income).

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