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How does each of the following transactions affect (i) the current account balance and (ii) the...

How does each of the following transactions affect (i) the current account balance and (ii) the capital account balance for Australia? Show that in each case the identity that the trade balance plus net capital inflows equals zero applies. a) An Australian exporter sells software to Israel. She uses the Israeli shekels received to buy stock in an Israeli company. b) An East Timorese firm uses proceeds from its sale of oil to Australia to buy Australian government bonds. c) And East Timorese firm uses proceeds from its sale of oil to Australia to buy oil-drilling equipment from an Australian firm. d) A British financial investor authorises a bank transfer from his account in New York to purchase shares of AMP (an Australian company).

Solutions

Expert Solution

Current account balance of a country shows ( all transactions ) debit and credit amount of money involving trade in goods and services whereas capital account shows the the inflow and outflow amount due to investments in any form.

( Ia) Australian export to Israel and import from Israel = Australia receives payment for software in current account ( credit ) + ( - ) The country pays for buying stock from capital account ( Debit ) = 0

( b ) East Timore = Receives money in current account for selling oil to Australia ( Credit ) + Buy Australian government bonds ( debit ) ( pays back money from capital account ) = 0.

( c ) East Timore = Receives money in current account for selling oil to Australia ( Credit ) + pays money for buying oil-drilling equipment to an Australian firm. ( current account is debited ) = 0

( d ) British Investor = Britain's capital account is debited for paying money for buying shares of AMP.

Rahul Sunny answered 9 months ago
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