Question

The U.S. Department of Agriculture donates $125 million of rice to North Korea.

This is recorded on the U.S. balance of payments as

Group of answer choices

Current transfers: credit

Goods: credit

Current transfers: debit

Goods: debit

Answer 1

Answer:

Let us first understand the term : Balance of Payments.Balance of Payments refers to a statement which records all the monetary transactions between a country(its residents) and the rest of the world.

Balance of Payments comprise of the following three components:

• Current Account
• Capital Account
• Financial Account

For this particular question we will concentrate on Current Account.Current Account refers to the sum of a country's balance of trade(exports -imports), net income and unilateral transfers.Let us understand each of these in details:

Balance of Trade:

Balance of Trade comprises of two components:Balance of Trade of Physical Goods(tangible goods that can be touched and seen) and Balance of Trade of Services(Intangible goods that cannot be touched or felt).

An export of physical goods(ie: money coming in) is treated as a credit while an import of physical goods(ie: money going out) is treated as a debit.Similarly if money is being paid for a service it is treated as debit and money being received for rendering a service is treated as credit.

Net Income:

Any money coming in a country on account of either salaries, portfolio investment , direct investment etc is treated as credit.Any money going out of the country due to salaries or portfolio investments etc is treated as debit.

Current Transfers:

Current Transfers are one-way transfers of goods, services, etc from one country to another with nothing being received in return.Some examples are: remittances of workers, international aid,etc.

A current account transfer going out from a country to another country is treated as a negative value(debit) in that country's balance of payments.(the country's which is transferring).

In the question:USA is transferring $ 125 million of rice to North Korea but will not receive anything in return so it is an example of current transfer.Moreover the funds(goods) are going out of USA so it will be treated as a negative value or debit.

Hence:Option (C) is the correct answer.