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Economics Question from CIE AS watch

1. Hello, I was doing revision for my economics paper, and I came across with this problem that made me extremely confused even after googling. The marking scheme states that the answer is C.

22. In August 2013, a Dutch insurer announced it wished to sell its South Korean Life Insurance group to a South Korean company for \$1.65 billion. How would such a sale be recorded on the Dutch balance of payments?
A a negative entry in the direct investment section of the financial account
B a negative entry in the investment income section of the current account
C a positive entry in the direct investment section of the financial account
D a positive entry in the investment income section of the current account

(9708/13/M/J/16)
2. (Original post by NigelCws)
Hello, I was doing revision for my economics paper, and I came across with this problem that made me extremely confused even after googling. The marking scheme states that the answer is C.

22. In August 2013, a Dutch insurer announced it wished to sell its South Korean Life Insurance group to a South Korean company for \$1.65 billion. How would such a sale be recorded on the Dutch balance of payments?
A a negative entry in the direct investment section of the financial account
B a negative entry in the investment income section of the current account
C a positive entry in the direct investment section of the financial account
D a positive entry in the investment income section of the current account

(9708/13/M/J/16)
There is inward foreign direct investment (FDI) and outward FDI. Inward FDI occurs when someone from another country purchases some asset in the domestic country (the Netherlands in this case). Outward FDI would, of course, be when someone from the domestic country (i.e. someone Dutch) went to purchase an asset in a foreign country. Based on this logic, we can see that the inward FDI is occurring, due to the fact that the Dutch is selling assets (its life insurance group) to a foreign company, which (in reverse) means that someone from a foreign country is buying assets in the domestic country (the Netherlands). Inward FDI gets counted as a positive entry in the direct investment section of the financial account, whilst outward FDI gets counted a negative entry. Based on this logic, the sale would be recorded as a positive entry in the direct investment section of the financial account, as the sale was a form of inward FDI. Hopefully that explanation is correct and makes sense
3. (Original post by KevinLonge)
There is inward foreign direct investment (FDI) and outward FDI. Inward FDI occurs when someone from another country purchases some asset in the domestic country (the Netherlands in this case). Outward FDI would, of course, be when someone from the domestic country (i.e. someone Dutch) went to purchase an asset in a foreign country. Based on this logic, we can see that the inward FDI is occurring, due to the fact that the Dutch is selling assets (its life insurance group) to a foreign company, which (in reverse) means that someone from a foreign country is buying assets in the domestic country (the Netherlands). Inward FDI gets counted as a positive entry in the direct investment section of the financial account, whilst outward FDI gets counted a negative entry. Based on this logic, the sale would be recorded as a positive entry in the direct investment section of the financial account, as the sale was a form of inward FDI. Hopefully that explanation is correct and makes sense
Thanks for replying. Can you add some detail about what happens in the current and capital account too? I believe that would help me understand it better.
4. (Original post by NigelCws)
Thanks for replying. Can you add some detail about what happens in the current and capital account too? I believe that would help me understand it better.
i could be wrong here, but I don't actually believe anything would happen to the capital account in this example. For the current account, stuff would happen to the investment income section. Investment income is essentially just the money earned from an investment, and which direction it is going from. As a South Korean firm bought a Dutch asset (the insurance group), the South Korean firm will receive any of the money earned from the South Korean insurance group in the Netherlands. When the South Korean firm does receive money from the investment, this will be money going from inside the Netherlands to the South Korean firm, and so the money would be going out of the Netherlands. As a result, any money earned from the South Korean's investment in the South Korean insurance group in the Netherlands, would be negative entry in the investment income component of the Dutch current account.

If you don't understand any of this stuff, I would advice that you look at this video:
5. (Original post by KevinLonge)
i could be wrong here, but I don't actually believe anything would happen to the capital account in this example. For the current account, stuff would happen to the investment income section. Investment income is essentially just the money earned from an investment, and which direction it is going from. As a South Korean firm bought a Dutch asset (the insurance group), the South Korean firm will receive any of the money earned from the South Korean insurance group in the Netherlands. When the South Korean firm does receive money from the investment, this will be money going from inside the Netherlands to the South Korean firm, and so the money would be going out of the Netherlands. As a result, any money earned from the South Korean's investment in the South Korean insurance group in the Netherlands, would be negative entry in the investment income component of the Dutch current account.

If you don't understand any of this stuff, I would advice that you look at this video:
You have definitely helped my a lot in understanding this topic. Thanks for taking your time to answer my question.
6. (Original post by NigelCws)
You have definitely helped my a lot in understanding this topic. Thanks for taking your time to answer my question.
No problem! I sent you a message earlier btw too, so hopefully the stuff in there can help as well.

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