Question

All of the transactions below come from The Lord of the Rings.  Show how each is recorded in the balance of payments for the specified location.  Remember, all transactions produce two entries:  a credit (+) and a debit (–).  If a part of the transaction involves the current account, you must specify which portion of the current account is involved (i.e., the trade balance, net factor income from abroad, or net unilateral transfers).

1.  The elves of Lothlórien give “foreign aid” to Frodo Baggins (who is a resident of the Shire) in the form of elven bread (lembas) worth one silver penny for his journey to Mordor.  Please write the entries for this transaction in the national accounts of the Shire.

Answer 1

Foreign aid is an unilateral transfer . Nothing is exchanged in return . So this is a surplus in current account as unilateral transfers are part of current account . It is a current account credit . It is part of net unilateral transfers .