Question

1. Consider the following international transactions, assuming that you are from the UK. The structure of the Balance of Payments (BoP), as seen in class, is reported in Table 1. Suppose that we want to input the transactions in the UK Balance of Payments. Complete Table 2 indicating how each transaction would be reported in the UK BoP, i.e. the sub account (Current/Capital/Financial account, and the additional sub-category) and the sign with which it will appear, as in the example. [HINT: remember that in the Financial Account when we “import capital”, i.e. when there is a financial inflow, it is recorded with a +, while an outflow is a minus.] (2.5 points)
   TABLE 1. STRUCTURE OF THE BALANCE OF PAYMENTS

   Current Account	Balance of Goods (exports/imports)
   	Balance of Services (exports/imports)
   	Balance of Income (receipts/expenditures)
   Capital Account	(receipts/expenditures)
   Financial Account	Official Reserve Assets (inflow/outflow)
   	Other Assets – Foreign Direct Investment, Portfolio Investment, Loans, ... (inflow/outflow)
   	Statistical Discrepancy

   TABLE 2. RECORDING INTERNATIONAL TRANSACTIONS IN THE BoP
   
   

   TRANSACTION	BALANCE OF PAYMENTS ACCOUNT AND SIGN (+/-)
   1. Export of goods to Germany.	Current Account, Balance of Goods (+)
   2. Import of goods from US
   3. Import of insurance from Italy
   4. North-american tourits’ expenditures in the UK
   5. Expenditures of UK tourists in China
   6. Remittances from Indian citizens, resident in the UK
   7. UK direct investments in Saudi Arabia
   8. Interest received from UK investments in Argentina
   9. A citizen of Morocco buys UK Government Bonds.
   10. Interest payments for foreign direct investment in UK
   11. A patent is bought from France with a loan
   12. Humanitarian aid to Third World Countries

Answer 1

In the BOP account, an inflow of foreign exchange (receiving money from abroad) is recorded on the positive side and an outflow of foreign exchange (paying money to abroad) is recorded on the negative side.

The Current Account records-

• International trade of goods and services (like tourism, shipping, banking, insurance)
• Net income (income received by residents minus income paid to foreigners, it also includes investment income like interest, rent and profits) and
• Transfer payments (remittances, gifts, donations, grants, government aid, etc)

The Financial Account measures an increase or decrease in international ownership of assets like direct investments, securities- stocks and bonds, foreign exchange reserves, deposits at foreign banks, loans to and from abroad, etc.

The Capital Account measures transactions that don't affect current period's income, production, or savings, but affect the future income, production, or savings. For eg- trademarks, copyrights, patents, mining rights, etc.

1. Export of goods to Germany- This will be recorded on the positive side(+) of the Current Account since UK is selling goods to Germany and receiving money for it. So, there is an inflow of foreign exchange in the UK.

2. Import of goods from US- This will be recorded on the negative side(-) of Current Account since UK is buying goods from US and paying money to it. Hence this is an outflow of UK's money.

3. Import of insurance from Italy - Insurance is considered a service and is recorded in the Current Account. Since UK is receiving insurance from Italy, there is an inflow of foreign exchange, which will be recorded on the positive side(+) of the Current Account.

4. North American tourist expenditures in the UK- This will be recorded on the positive side(+) of the Current Account, since UK is receiving money from international tourists in lieu of the services being provided to them in the UK. So there is an inflow of foreign exchange.

5. Expenditures of UK tourists in China- this is exactly opposite to the one above. Here, UK tourists are spending their money in China, so there is an outflow of money from the UK. Hence, this will be recorded on the negative side(-) of the Current Account.

6. Remittances from Indian citizens, resident in the UK- This means that the Indians are sending money to their families living in some other country. Since the Indians are residents of the UK, this will mean an outflow of UK's money and so it will be recorded on the negative side(-) of the Current Account.

7. UK direct investments in Saudi Arabia- This will be recorded on the negative side(-) of the Financial Account since UK is purchasing assets abroad so there is an outflow of money from the UK.

8. Interest received from UK's investment in Argentina- This will be recorded on the positive side(+) of the Current Account, since there is an inflow of foreign exchange from abroad.

9. A citizen of Morocco buys UK Government Bonds- This will be recorded on the positive side(+) of the Financial Account, since there is an inflow of money from abroad.

10. Interest payments for foreign direct investment in UK- This means interest paid on assets held by foreigners in the UK. This will be recorded on the negative side(-) of Current Account, since there is an outflow of money from UK to abroad.  

11. A patent is bought from France with a loan- patent bought will be recorded on the negative side(-) of the Capital Account since money is paid to France, so there is an outflow of foreign exchange. The loan taken for the patent will be recorded on the positive side(+) of the Financial Account, since there is an inflow of money from abroad.

12. Humanitarian aid to Third World Countries- This is a transfer payment, so it will be recorded on the negative side(-) of the Current Account, since there is an outflow of money from UK to Third World Countries.