Question

In: Finance

Suppose that home country A has the following transactions with foreign country B. For each transaction,...

Suppose that home country A has the following transactions with foreign country B. For each transaction, indicate and explain the appropriate debit and credit entry in A’s balance-of payments accounts.

a) A firm in country A sells $9,000 of iron & copper to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank.

b) An importer in country A buys $5,000 of apparel from a country-B supplier, paying for the goods by writing a check to be deposited into the B firm’s bank account in a country A bank.

which accounts would be debited and credited for each (current account, capital account, and financial account)

Solutions

Expert Solution

(a) Answer: In this transaction in A's balance of payments (current account) shall be credited in the domestic currency (i. e.by $ 9000)

(assuming $ is the domestic currency of country A).

(b) Answer:In this transaction in A;s balance of payment (current account) shall be debited in the domestic currency (i.e. by $ 5000)

Reason:

Current account moniters the flow of fund from goods and services trade (import and export) between countries.This includes money received or spent thereon.

Capital account monitors the flow of international capital transaction.

Financial account monitors the flow of funds pertaining to investments in business.

Conclusion: The above transactions are in the nature of current account transaction and therefore the current account should be credited and debited respectively in (a) and (b).

jeff jeffy answered 2 years ago
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