Question

For each of the following transactions, explain what happens to the merchandise trade balance, current account balance, and financial account balance in both the United States and Mexico. The exchange rate is 2 Mexican pesos per U.S. dollar.

(a) A Mexican firm spends 4 million pesos to buy radiology equipment from a U.S. firm.

(b) A U.S. firm buys 20,000 sombreros at 20 pesos each.

(c) Mexican computer firms send 200 programmers to universities in the United States, paying tuition and expenses of $3000 each.

(d) A Mexican entrepreneur gives 50,000 pesos to the United Way of San Antonio, Texas.

(e) Mexican investors buy $10 million worth of 30-year U.S. Treasury bonds.

Answer 1

Merchandise trade balance it the difference of the value between the imported and exported goods.

The current account balance is a record of the country's international transaction with the rest of the world. It includes all the transaction which are of economic value (other than those in financial account).

Financial account balance includes capital flow, short term or long term. It basically tells when financial assets change hands between the two countries.

a. A Mexican firm buys 4 million pesos worth of goods from the US

It would add 2 million dollars in the merchandise trade balance and the current account balance of the USA.

It would subtract 4 million pesos from the merchandise trade balance and the current account balance of Mexico.

US merchandise Balance	Dollars
Exports	$2,000,000

US current Balance	Dollars
Exports	$2,000,000

Mexico Merchandise Balance	Pesos
Imports	-4,000,000

Mexico Current Balance	Pesos
Imports	-4,000,000

b. This is an import for the US and export for Mexico.

It would subtract 20,000 from the merchandise trade balance and the current account balance of the USA.

It would add 40,000 in the merchandise trade balance and the current account balance of Mexico.

US merchandise Balance	Dollars
Exports	$2,000,000
Imports	-$20,000

US current Balance	Dollars
Exports	$2,000,000
Imports	-$20,000

Mexico Merchandise Balance	Pesos
Imports	-4,000,000
Exports	40,000

Mexico Current Balance	Pesos
Imports	-4,000,000
Exports	40,000

c. Here a Mexican firm will pay $3000 each for 200 students to study in the USA. It will only affect the current account because no transfer of goods is taking place. The amount is $600,000 or 1,200,000 pesos. It would add $60,000 in US current account and subtract 1,200,000 pesos from Mexico's current account

US current Balance	Dollars
Exports	$2,000,000
Imports	-$20,000
Received from foreigners	$60,000

Mexico Current Balance	Pesos
Imports	-4,000,000
Exports	40,000
Paid to foreigners	1,200,000

d. It is a unilateral transfer, United Way of San Antonio is a non-profit organization based in Texas. It will only affect the current account.

It will add $25,000 in the US current account and subtract 50,000 pesos from Mexico's current account.

US current Balance	Dollars
Exports	$2,000,000
Imports	-$20,000
Received from foreigners	$60,000
Unilateral Transfer receipts	$25,000

Mexico Current Balance	Pesos
Imports	-4,000,000
Exports	40,000
Paid to foreigners	1,200,000
Unilateral Transfer Payments	50,000

e. This is a financial transaction, meaning assets are being transferred so it will affect financial account balance.

It will add $10,000,000 in US financial accounts as there is an inflow of money from a foreign country. It will subtract 20,000,000 pesos from Mexico's financial account.

US Financial Balance	Dollars
Sale of bonds to foreign national	$10,000,000

Mexico Financial Balance	Pesos
Purchase of foreign bond	20,000,000