Question

Suppose that home country A has the following transactions with foreign country B. For each transaction, indicate and explain the appropriate debit and credit entry in A’s balance-ofpayments accounts.

a) A firm in country A sells $9,000 of iron & copper to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank.

b) An importer in country A buys $5,000 of apparel from a country-B supplier, paying for the goods by writing a check to be deposited into the B firm’s bank account in a country A bank

Answer 1

Nostro Account :

Nostro (translated from Italian) means “our”.

It’s a way of saying, “Our money that is on deposit at your bank”.

Nostro is an accounting term used to describe an account another entity (Bank) holds.

Vostro Account:

The term Vostro translated from Italian means “yours“, as in your account.

It’s a way to say, “Your money that is on deposit at our bank”.

Loro Accounts:

Loro accounts are generally held by a 3rd party bank, other than the account maintaining bank or with whom account is maintained.

Balance of payments :

The balance of payments tracks international transactions. When funds go into a country, a credit is added to the balance of payments (“BOP”). When funds leave a country, a deduction is made.

Therefore in this instant case, the appropriate debit and credit entry in Country A’s balance-of payments accounts are as follows :-

a) A firm in country A sells $9,000 of iron & copper to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank.

answer a) In this case,Country A sold iron & copper to a country B firm of $9000 that means Country A recieves its consideration against its sale.On the other hand Country B has to make payment of $9000 to Country A.For this,Country B must deliver Dollars from its nostro account to the nostro account of Country A.

Therefore Country A credit is added to the balance of payments account of $ 9000 amount.

b) An importer in country A buys $5,000 of apparel from a country-B supplier, paying for the goods by writing a check to be deposited into the B firm’s bank account in a country A bank

answer b) In this case,importer of Country A buy apparel from country B supplier of $5000 that means Country B recieves its consideration against its sale.On the other hand importer of Country A has to make payment of $5000 to Country B supplier.For this,Country A must deliver Dollars from its nostro account to the nostro account of Country B.

Therefore,Country A a deduction is made to the balance of payments account of $ 5000 amount.