Question

The balance of payments consists of three accounts which together record the flow of money into and out of a country. The current account records the sale and purchase of goods and services, the capital account records the sale and purchase of financial assets, and the official settlements (OS) account records changes in government holding of foreign currencies. Anything that brings domestic currency into the country is recorded as a positive while anything that sends domestic currency out of the country is a negative. Based on this description, identify which UAE account (current, capital, or OS) each transaction would be included in and whether it would be positive or negative.

a) Etihad Airlines buys 2 new airplanes from Boeing (a US company)

b) A London businessman buys 100 shares of Etihad Airlines stock

c) The UAE government buys 100,000 Omani rial

d) A UAE housewife receives an interest payments of 250,000 AED on short-term foreign deposits in a UK bank

e) A petrol station in Iceland buys 3,000 liters of petrol from ADNOC

f) The UAE government sells 1 million US dollars

g) The UAE government lends 1 billion euros to the Greek government

Answer 1

(a) Etihad Airlines buys 2 new airplanes from Boeing (a US company)

This transaction amounts to purchase of goods from foreigners and would result in an outflow of domestic currency.

So, this transaction would be included in the current account and would be recorded as negative item.

(b) A london businessman buys 100 shares of Etihad Airlines stock

This transaction amounts to sale of financial asset to foreigners and would result in the inflow of domestic currency.

So, this transaction would be included in capital account and would be recorded as positive item.

(c) The UAE government buys 100,000 Omani rial

This transaction amounts to increase in foreign currency holding of government and would result in the outflow of domestic currency.

So, this transaction would be included in Official Settlements Account and would be recorded as negative item.

(d) A UAE housewife receives an interest payment of 250,000 AED on short-term foreign deposits in a UK bank

This transaction would be recorded in current account and since it will lead to inflow of domestic currency, it would be recorded as positive item.