Question

Question 16. Suppose that the following transactions take place on the Canibalian balance of payments. Analyze the effects on the corresponding part of the current account, the capital account, the financial account and the official settlements account. a) Goeing, a Canibalian aerospace company, sells $3 billion of its brand new and super-safe 121 max 888 airplanes to the People's Republic of China, which pays with proceeds from a loan from international banks. b) Pikko, a Japanese investment bank, purchases $70 million of Canibalian Treasury bonds. Pikko draws down its account with the National Bank of Rokitkowo to pay for the bonds. c) General Bikes, a Canibalian automobile company, sends a dividend check for $25,255 to a Canadian investor in Toronto. The Canadian investor deposits the check in a Canibalian dollar-denominated bank account at the Bank of Montreal. d) The Canibalian central bank is authorized to intervene in the foreign exchange market. They purchase $5 billion with Japanese yen and euro that they hold as international reserves. e) Honda of Canibalia, the Canibalia subsidiary of the Japanese automobile manufacturer, obtains $275 million from its parent company in Japan in the form of a loan to enable it to construct a new state-of-art manufacturing facility in Rokitkowo City.

credit + , debit-

Answer 1

a) When Goeing sales its produced goods to People's Repblic of China, it will be recorded in its Current Account.

credit   $ 3,000,000,000

b) When a Japanese company buys bond of Canibalian Treasury, it is recoreded as an investment cash inflow in the Balance of Payments of Canibalian company and recorded in the Financial Account .

credit $ 70,000,000

c) The transaction of the dividends on stock holding and debt securities are recorded in the Current Account. So, the Canibalian Balance of Payments looks like:

debit $ 25,255

d) The transactions regarding foreign exchange is recoreded in the Financial Account. So, the Canibalian Balance of Payments looks like:

debit $ 5,000,000,000

e) The capital transfer in order to acquire or purchase of fixed assets are recorded in Capital Account. So, the Canibalian Balance of Payments looks like:

credit $ 275,000,000

Rules of Recording on Balance of Payments:

According to the U.S. Federal Reserve, “The BOP [balance of payments] includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of nonproduced, non-financial assets; and the financial account, which records investment
flows.”

Current Account
The current account comprises three sub-accounts:
Merchandise and services:. Merchandise consists of all raw materials and manufactured goods bought, sold, or given away. Services include tourism, transportation, and business and engineering services, as well as fees from patents and copyrights on new technology, software, books, and movies.

Income receipts: include foreign income from dividends on stock holdings and interest on debt securities.

Unilateral transfers: are one-way transfers of assets, such as money received from those working abroad and direct foreign aid. In the case of foreign aid and gifts, the capital account of the donor nation is debited.

Capital Account
The capital account comprises two sub-accounts:
Capital transfers: include debt forgiveness and goods and financial assets that migrants bring when they come to a country or take with them when they leave. Capital transfers also include the transfer of title to fixed assets and of funds linked to the purchase or sale of fixed assets, gift and inheritance taxes, death duties, and uninsured damage to fixed assets.

Sales and purchases of non-financial assets: that are not produced assets include rights to natural resources and intangible assets, such as patents, copyrights, trademarks, franchises, and leases.

Financial Account
The financial account comprises two sub-accounts:
Government-owned assets abroad: include gold, foreign currencies, foreign securities, reserve position in the International Monetary Fund, credits and other long-term assets, direct foreign investment, and claims against foreign banks.

Foreign-owned assets in the country: are divided into foreign official assets and other foreign assets in the domestic country. These assets include domestic government and corporate securities, direct investment in the domestic country, domestic country currency, and domestic liabilities to foreigners reported by domestic banks.