Question

Q2 - (Balance of Payments) Explain where in the U.S. balance of payments an entry would be recorded for each of the following:

* A Hong Kong financier buys some U.S. corporate stock.

* U.S. tourist in Paris buys some perfume to take home.

* A Japanese company sells machinery to a pineapple company in Hawaii.

* U.S. farmers gave food to starving children in Ethiopia.

* The U.S. Treasury sells a bond to a Saudi Arabian prince.

* A U.S. tourist flies to France on Air France.

* A U.S. company sells insurance to a foreign firm.

Answer 1

1. Buying and selling stocks is considered capital transaction here Hong Kong financer is buying US corporate stock .This means that capital is being flowed into the economy this would be included in the capital inflow transaction of US balance of payment account.

2. A US tourist buying perfume from France would be considered under the Merchandise imports in the US Balance of payments as the good is being imported by domestic tourist.

3. USA firm buying machinery from Japanese firm would be considered an import of merchandise hence would be included in the Merchandise import section of the balance of payment account of US.

4.USA farmers give food to starving children in Ethiopia is a unilateral transfer by US to Ethiopia in the form of food. This is not trading and just a unilateral transfer so would be recorded in net unilateral transfers.

5. Buying and selling bonds is considered the capital transaction since the bond is been sold to a foreign investor it would result in inflow of capital .Hence this transaction would be recorded in inflow of capital in balance of payment accounts of US

6. A US tourist flying to France through Air France means that the tourist of US is using service of France, this would be recorded in the service imports transaction because France is a foreign country and its services are being used by a domestic tourist.

7. US company selling insurance to a foreign firm would mean that the services are being exported to foreign firm and would be recorded in the service export transaction of Balance of payments of US.

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