THE STRUCTURE OF THE BALANCE OF PAYMENTS

The capital and financial account records transactions relating to capital transfers and portfolio and direct investment respectively.

Exercise #1. Each item below is involved in an international transaction:

Raw materials, merchandise, purchase of buildings,manufactured goods, tourism, earnings on investment, purchase of land, royalties from patents, royalties from copyrights, receipts from stosk, receipts from bond, securities, emigrants sending money home.

Place each item to the appropriate account, either Current or Capital&Financial.

DEBIT & CREDIT

The balance of payments deal with some accounting, namely

Debit – negative (-) and Credit – positive (+).

This doesn’t mean that credits are necessarily good and debits are necessarily bad. All this means is that debits are substracted and credits are added to BOP.

Example. When you withdraw $100 from the bank, the bank debits your account $100 (substract $100 from your account). The card you use to withdraw money from your account is called a debit card. So, debits are minus or negative (-). Credits on the other hand are additions or positive (+). If someone says to you “I will credit your account”, this means that he is going to add to you account some money.

So, in the balance of payments any transaction that causes money to flow into a country results in a credit (+) to the BOP; transactions that result in money outflows are reported as debit (-).

Exercise #2. Place each transaction to the appropriate section of the US balance of payments with the following comments:

1) This is а CURRENT (CAPITAL AND FINANCIAL) acount transaction;

2) - Money flowing INTO the country is recorded as

CREDIT, ie POSITIVE or

- Money flowing OUT OF (INTO) the country is recorded as

DEBIT, ie NEGATIVE

A) US investor buys Australian Government bonds for $100000;

B) Japanese automobile manufacturer builds plant in Massachusets for $1000000000;

C)US oil company sells $500000000 of oil to Germany;

D) US retail giant buys $2000000000 worth of merchandise from China;

E) US citizen sends $20000 to a relative in Spain;

F)US marketing firm pays $1000000 to telephone marketers in Ireland;

G) US company buys a small electronics firm in India for $20000000;

H) British investor buys $50000 worth of equity stock from a US company;

I) US defense department sends aid of $5000000 to Pakistan government;

J) German investor buys an apartment building in New York for $5000000;

K) San Francisco investor receives $100000 in dividends from a British stock investment;

L) US farmers sells $2000000 of wheat to Norway;

M) US charities send $100000 of relief aid to Africa;

N) Japaneze owned auto plant in Indiana sends $10000000 in profit back to home office in Japan;

O) American buys French vineyard for $10000000;

P) Chinese investor buys $50000 of stock sold on the New York stock exchange;

Q) British sitizen from London sends $1000000 to his son who lives in Los-Angeles, California;

R) California wineries sell $20000000 of wine to British retailers;

S) Chinese company buys US company in Arkansas for $1050000000;

T)British charity sends $120000 to US hurricane disaster victims;

U) US pharmaceutical company exports $488900000 of drugs to Asian countriies;

V) US bank buys a bank in the Cayman Island for $21000000;

W) US consumers buy $1000000000 of autos from Germany.

EXERCISES

TOPIC#2

INDICATORS OF INTERNATIONAL

TRADE OF THE COUNTRY