Question

1. Explain how each of the following transactions generates a credit and a debit in the American balance of payments accounts and described (BRIEFLY) how each entry would be classified:
   1. An American buys a share of German stock, paying by writing a check on an account with a Swiss bank.
   2. The Korean government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy Korean currency from its citizens
   3. A tourist from Detroit buys a meal at a restaurant in Lyons, France, paying with a traveler’s check
   4. A California winemaker contributes a case of cabernet sauvignon for a London based win tasting.
   5. A US owned factory in Britain uses local earnings to buy additional machinery

Answer 1

1:- first transaction is

Purchase of German stock ( debit a/c)

To sales of swiss holding (credit to financial a/c).

In this transaction sale is credit because swiss holding decrease

The purchase of German stock increase that why it is debit which increase US assest.

2:- second transaction is

Sale to Japanese ( debit to financial a/c)

To increase of currency ( credit to financial a/c)

Sales to government decrease the assest held by US. So it is debited.

But purchase by Korean of US assest increase currency so it is credited.

3) :- third transaction

current a/c (debit)

To capital a/c ( credit)

Because when you buy it means you are purchasing foreign good that means US import you services. SO it is debited

And due to purchase tourist pay the money by travelers check it means currency export in US so it transer to credit side.

4) :- fourth transaction is

Current a/c (debit)

To capital a/c ( credit)

Here the current a/c is unilateral transfer.

And us export a good that why capital a/c is credit.

In this there is no doubt transer of good but there is no transaction related to its. So it is in debit side.

Because their is no transaction then it is also not recorded in balance of payment. But here we show transaction so the reason is US EXPORT a good.

5) :- fifth transaction is

Current a/c ( debit) (this is because investment incomes INCREASE)

To capital a/c ( credit). ( this is because increase in FDI)