Question

In: Economics

Keep in mind that each transaction triggers two offsetting entries in the BoP Example: Starbucks buys...

Keep in mind that each transaction triggers two offsetting entries in the BoP

Example: Starbucks buys coffee from an Indonesian farmer for USD 50 K who in return acquires fertilizer from a US manufacturer

US Current Account (CA):

Trade: -50 K (import of coffee)

Trade: +50 K (export of fertilizer)

For each of the following transactions, indicate how the transaction would appear in the US balance of payments. Indicate the USD amount (with the correct sign) as well as the appropriate accounts and sub-accounts:

1. A U.S. oil company imports oil from a firm in Canada. The firm pays USD 135M for the oil which is kept in a US bank by the Canadian firm

2. Apple pays USD 790 M dividends to its non-US shareholders who reinvest the dividends in Apple shares.

3. A U.S. company acquires a 40% stake in a joint venture (JV) in China for USD 74 M. The payment is converted from USD to RMB by the People’s Bank of China (PBC), i.e. the Chinese central bank, at the official exchange rate. PBC then provides the USD to a state-owned Chinese enterprise that acquires a US firm.

Expert Solution

Current account records following transactions: Export-import of goods/services. Income in the form of earnings or investment and transfers.

Capital account records all investments in non produced non financial assets.

Financial accounts enters investments in the form of direct investments and portfolio investments.

1. A U.S. oil company imports oil from a firm in Canada. The firm pays USD 135M for the oil which is kept in a US bank by the Canadian firm

US Current account:

Goods import: -135

Money kept in US bank will not be recorded.

2. Apple pays USD 790 M dividends to its non-US shareholders who reinvest the dividends in Apple shares.

US Current account

Investment income: -790 M

US financial account:

Portfolio investment : +790 M

3. A U.S. company acquires a 40% stake in a joint venture (JV) in China for USD 74 M. The payment is converted from USD to RMB by the People’s Bank of China (PBC), i.e. the Chinese central bank, at the official exchange rate. PBC then provides the USD to a state-owned Chinese enterprise that acquires a US firm.

USA Financial account:

Foreign portfolio investment : -74 M.

Foreign portfolio investment : + Dollar value of Yuans converted into dollars in the form of dollars.

Rahul Sunny answered 1 year ago

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