Question

This question is about the Balance of Payments Accounts. Record each transaction listed below. Make sure to separate the current and the financial accounts.

a. The export of wine from California to France for $100 paid for with US dollars that the French importer holds at home in a box.

b. The import of a BWM for $200 (it’s used) from Germany paid for with euros that the American importer held in bank account in Frankfurt.

c. What is the Current Account Balance? What is the Financial Account Balance? Is there a Balance of Payments deficit? A surplus?

Now suppose that the importer of the BMW only has $100 worth of euros available, and purchases the remaining $100 worth of euros directly from the Federal Reserve.

d. Repeat the recording of the transaction described in parts b. and c. Have the Balance-of-Payments deficit or surplus been affected? Explain.

Answer 1

(a) Current account as it is import and export of goods. From one country to another.

(b) Financial account as it is kept in country's bank by another country person for investment purpose. As it is financial investment so it will be counted in financial account.

(c) USA did export wine to France , hence USA balance of payments surplus and France have Balance of payment deficit as france did import.

(d) As Germany exported BWM $200 to person living in USA who paid euros from bank at Frankfurt. This means Germany's money will be transferred from one person to another no external payment is done. Hence there will be neither surplus nor deficit in balance of payments.

(d) Balance of payment will be deficit as person borrowed capital from fedral reserve hence borrowing will be creating liability hence will be make balance of payments deficit on behalf of USA.

Germany's balance of payment will be having surplus as now germany will get external payment from USA.

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