Question

ECO 345 – BOP Assignment Determine how each of the following transactions are entered into the US balance of payments?

1. Boeing Corporation sells five passenger planes to China for $35,000,000 China pays $5,000,000 of this amount in cash out her dollar deposits with Citibank in New York. The remainder of the amount is financed by the Export-Import Bank of the United States.

Answer 1

The BOP is calculated by the sum of capital account transaction, current account transaction, and official reserve. The sum of all three accounts is always equal to zero. then transaction in any account has its equal negative entry in another account.

If Boeing sells passenger planes to China, this is the export of goods and accounted as a positive amount in the current account. Then sales of passenger planes are +$35000000.

If China pays this by cash held in US banks, this implies a reduction of liability of the US by the same amount and accounted as a negative amount in capital amount by -$5000000. The remaining amount ($30000000) is a China loan from the US and entered as a positive amount in the capital account as this represents the claims of the US on China's asset. Again this loan is credited in China account held at the import-export bank which is a negative account as this is a liability to the US. Again as China uses this amount to make the payment to Boeing, this recorded as a decrease in liability and minus item in the capital account. Thus capital account record this as -$30000000.

Then the transaction is as follows

		Credit	Debit	Balance
Current account
Merchandise export		$35,000,000		$35,000,000
Capital Account
US bank Claims	Increase in a claim against the foreigner		$30,000,000	-($30,000,000)
US bank Liabilities	Loan increases bank liability to foreigner	$30,000,000		$30,000,000
	Reduction in US bank liability		$5,000,000	-($5,000,000)
	Reduction in US bank liability		$30,000,000	-($30,000,000)
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