Question

Indicate how each of the following transactions is entered into the US balance of payments with double-entry bookkeeping:

• A U.S. firm exports $500 of goods to an Australian retired man who pays with his bank account savings from his Australian Bank

• A U.S. economics major purchases a travel service for $200 to Italy and pays it with money from his U.S. bank account

• The U.S. government gives $100 from a US bank to Cuba to favor greater economic growth

• A U.S. resident purchases a foreign stock for $400 and pays for it by increasing bank balances in the United States

• A foreign investor purchases $300 of U.S. treasury bills and pays by drawing down his bank balances in the United States by the same amount

--> Using this information, calculate the U.S. balance of payments

Answer 1

There are 3 main of Balance of Payments -

1. Current Account -This part of the balance of payments is regarded as the most important, as it shows a nation’s trading strength. If payments are greater than receipts, there is a deficit which is undesirable. This part is subdivided as shown below-

Visible Trade — trade in goods

Invisible Trade — trade in services

2. Capital Account - Investments and Balancing Others

3. Official Financing - equal to Current Account(net) + Capital Account(net)

Balance of Payment Calculation

1. Current Account-

Visible Trades - $500

Invisible Trades - ($300)

Net Balance under Current Account - $200

2. Capital Account-

Investments - ($400) + $300 => ($100)

Net Balance under Capital Account - ($100)

3. Official Financing - [ $200 + ($100)] => $100 surplus

• A U.S. firm exports $500 of goods to an Australian retired man who pays with his bank account savings from his Australian Bank - $500 credited to Current Account
• A U.S. economics major purchases a travel service for $200 to Italy and pays it with money from his U.S. bank account - $200 debited to Current Account
• The U.S. government gives $100 from a US bank to Cuba to favor greater economic growth - $100 debited to Current Account
• A U.S. resident purchases a foreign stock for $400 and pays for it by increasing bank balances in the United States - $400 debited to Capital Account
• A foreign investor purchases $300 of U.S. treasury bills and pays by drawing down his bank balances in the United States by the same amount - $300 Credited to Capital Account