Current vs. Capital Account in Balance of Payments

Steps:

• Define current account: includes trade balance (exports minus imports), net income, and unilateral transfers like aid.
• Define capital account: includes foreign direct investment (FDI) and portfolio flows.
• Evaluate options: check if each directly impacts trade, income, or transfers (current) versus investments (capital).
• Identify non-impact: FDI flows to capital account only.

Why D is correct:

• FDI represents capital transfers for investment, recorded in the capital and financial account per IMF Balance of Payments Manual, not current account.

Why the others are wrong:

• A: Higher export/import prices alter trade values, directly affecting the goods/services balance in current account.
• B: Foreign aid counts as unilateral transfers, a current account component.
• C: Exchange rate changes influence export/import competitiveness and values, impacting trade balance in current account.

Final answer: D