Mock Exam 2013 (PM Session) Question 40

[foamling]

An Australian firm purchased a patent for USD20,000 and machinery for USD21,500 from a U.S. firm when the exchange rates were as follows…
The solution goes on to say that the purchase of machinery does not constitute capital account and should be classified as a current account item and is thus ignored in the calculation. However, my understanding is that machinery is classified as a FDI and should be classified as the capital account as well.
Help anyone??
many thanks

 

[achokshi]

Curious to know the answer to this as well, I got this same question wrong. I thought it was foreign direct investment also.

 

[foamling]

yea i actually checked wikipedia and they explicitly stated that investment in machinery is part of FDI which is a part of Capital account items. Thats what is being taught in my economics classes as well…

 

[tickersu]

I think the machinery is considered a transaction in the current account because the Australian firm is importing a US export. They’re not investing abroad, which would be FDI. Remember, FDI involves some sort of operation abroad that you’ve invested in.

 

[foamling]

thanks tickersu! i think that makes sense!