Question

In: Economics

1. Identify whether each of the following is a debit or a credit in the country...

1. Identify whether each of the following is a debit or a credit in the country of Freedonia’s BOP and indicate where the item would be classified.

a. Freedonian firms export $250 million worth of goods.

b. Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.

c. A Freedonian firm purchases a shoe factory in Mexico for $30 million.

d. Freedonia receives $5 million in foreign aid from the United States.

e. Freedonian citizens deposit $15 million in a Citibank account in New York.

f. Freedonia imports $220 million worth of goods.

g. Freedonian firms borrow $45 million by issuing bonds in

the United States.

h. U.S. firms earn (and repatriate) $5 million in profits from

operations in Freedonia.

i. The Freedonia central bank buys $10 million in U.S.

Treasury bills.

2. In the previous example, suppose that these are all of the

entries in Freedonia’s BOP table. Calculate the value of errors

and omissions.

Expert Solution

a. Freedonian firms export $250 million worth of goods.

Reason- Credit, Merchandise export. Since it is export money flows in the country, hence it is credit. Goods→Merchandise.

b. Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.

Reason- Debit, Import services. Purchase of flight tickets means import of services. Money goes out of the country, hence it is debit.

c. A Freedonian firm purchases a shoe factory in Mexico for $30 million.

Reason- Debit, financial outflow. Purchase of factory is FDI.Money goes out of the country, hence it is debit.

d. Freedonia receives $5 million in foreign aid from the United States.

Reason- Credit, unilateral transfer. Foreign aid is transfer of money in the country hence it is credited.

e.Freedonian citizens deposit $15 million in a Citibank account in New York.

Reason- Debit, Financial outflow. Deposit in a foreign bank is outflow of money.Money goes out of the country, hence it is debit.

f. Freedonia imports $220 million worth of goods.

Reason- Debit, Merchandise importt. Since it is import money flows out of the country, hence it is debit. Goods→Merchandise.

g. Freedonian firms borrow $45 million by issuing bonds in

the United States.

Reason- Credit, financial inflow. Freedonian firm borrows money from US hence money flow in the country. It is credit.

h. U.S. firms earn (and repatriate) $5 million in profits from

operations in Freedonia.

Reason- Debit, income payments. US firms take money earned in Freedonia to US. Hence it is debit.

i. The Freedonia central bank buys $10 million in U.S.

Treasury bills.

Reason- Debit, financial outflow. Freedonian bank buys US bond so money goes out, i.e. financial outflow. Therefore it is debit entry.

Rahul Sunny answered 1 year ago

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