Foreign Direct Investment Shifts Production and Trade Flows

Steps:

• South Korea's factory in Switzerland means production occurs abroad, shifting output from domestic to foreign.
• Profitable factory in Switzerland exports goods, likely to South Korea, increasing South Korea's imports.
• South Korea's trade balance in goods (exports minus imports) worsens due to higher imports.
• Switzerland gains from local production and exports, improving its trade balance.

Why B is correct:

• Trade balance in goods worsens when imports rise without corresponding export increase, per the formula: trade balance = exports - imports.

Why the others are wrong:

• A: South Korea's imports increase as it buys from its Swiss factory, not decrease.
• C: Switzerland's trade balance improves from increased exports of factory goods.
• D: Factory produces goods, not services, so no impact on services balance.

Final answer: B