Question

Suppose that home country A has the following recorded transactions with foreign country B. Following the example below, for each transaction, indicate which item is a debit and which item is a credit (in Country A’s the balance of payments) and how the item would be identified in the balance of payments.

Example: An importer in country A buys $8,000 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.

Debit $8,000 of imports from country B

Credit $8,000 increase in foreign private assets in country A

(a) A firm in country A sells $6,000 of steel 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) A country A citizens give $1,000-worth of cash to country B relatives by writing a cheque on his bank accounts in country B.

(c) A citizen of country B buys a long-term bond of a company in country A. The buyer purchases the $5,000 bond by drawing down his/her checking deposit in a bank in A.

(d) A firm in country A purchases $3,000 of shipping services from a country B ocean freight carrier, paying for the services by drawing down bank deposits in B owned by the country A firm.

Answer 1

Solution :

(a) A firm in country A sells $6,000 of steel to a country B firm. Payment is made by the firm in B drawing down its checking account in a country A commercial bank.

Credit

Category I : Exports of goods = +$6,000

Debit

Category II : Decrease in foreign short-term private assets in Country A = -$6,000

(b) A country A citizens give $1,000-worth of cash to country B relatives by writing a cheque on his bank accounts in country B.

Debit:

Category I : Unilateral transfer made = -$1,000

Credit:

Category II : Decrease in short-term assets abroad = +$1,000

(c) A citizen of country B buys a long-term bond of a company in country A. The buyer purchases the $5,000 bond by drawing down his/her checking deposit in a bank in A.

Credit:

Category I : Increase in foreign long-term private assets in country A = +$5,000

Debit

Category II : Decrease in foreign short-term private assets in country A = -$5,000

(d) A firm in country A purchases $3,000 of shipping services from a country B ocean freight carrier, paying for the services by drawing down bank deposits in B owned by the country A firm.

Debit

Category I : Imports of services -$3,000

Credit:

Category II : Decrease in short-term private assets held abroad = +$3,000