Question

For each transaction below, enter its value and sign, and whether it belongs to the current or financial accounts. Compute the Current Account Balance, the Financial Account Balance, and indicate whether there is a Balance of Payment surplus or a Balance of Payments deficit (i.e. compute the Balance of Official Transactions).

a. The London Symphony Orchestra is hired to tour the United States. It is paid 100 British pounds, which the (American) tour organizer had in its bank account with a British Bank.

b. The United States Treasury pays interest on T-bills held by Black Rock, a British Bank, for $200. The bank holds the US dollars in a London account.

c. The Federal Reserve purchases $100 worth of euros from a French bank, paying in US dollars that the French bank holds on its balance sheet.

d. A Chinese holding company buys IMB, and American company, by acquiring its shares in the American stock market. The Chinese firm pays $400 to acquire IMB, and it pays with US dollars it had in its accounts.

e. The import of wool from Nepal to the United States for $100. The American importer pays for the wool in US dollars, which are then held in Nepal.

Answer 1

Balance of payment(BOP) is a record of all transactions made by a country with the rest of the world over a particular time period.There occures a transaction of viscible and inviscible good and services between countries.BOP determine how much money is going out and in of a counrty.

BOP has different components- current account ,financial account and capital account .Theoretically B OP should be zero.It happens when current account is balnced with combined account of financial account and capital account.

Current account indicate inflow and outflow of goods and services into a country. It includes money from raw materials and manufactured goods , transport and tourism, services like engineering,lawyers etc. Royalties from patents and copyright,income from assets like stocks and unilateral transfers also coming under current account.

In Capital account all international capital transfers recorded.It includes physical asset like land,non produced assets like mine.The transfer of funds received to the sale or acquisition of fixed assets , gifts and inheritance tax, death levies , uninsured damage to fixed assets, transfer of goods and assets by migrants leaving or entering a country are coming   under capital account.

In financial account international monetary flows related to  business, real estate, bonds , stocks,foreign reserves, gold,special drawing rights held with IMF, private assets held abroad ,foreign investment etc. are recorded.

current account value$ financial a/c value

service imported -100 service imported -100

(tour)

Good imported -100 service imported -200

service imported -100

service exported 400

current account balance = -100+-100=-200

finance account balance=400+-300=100

Balance of payment sarplus means a country export more goods, services or capital than its imports.That is inflow of money is more than outflow.

Balance of payment deficit means a country import more goods, services or capital than its export.That is outflow of money is more than its inflow.

balance of payment=balance of current account+balance of finane account

=-200+100=-100.

Here balance of payment is deficit .Total of current account and finance account indicates a negative value.

BOP should be zero