Question

5. This question is about the Balance of Payments Accounts. Record each transaction listed below. Make sure to separate the current and the financial accounts. a. The export of wine from California to France for $100 paid for with US dollars that the French importer holds at home in a box. b. The import of a BWM for $200 from Germany paid for with euros that the American importer held in bank account in Frankfurt. What is the Current Account Balance? What is the Financial Account Balance? Is there a Balance of Payments deficit? A surplus? c. Now suppose that the importer of the BMW only has $100 worth of euros available, and purchases the remaining $100 worth of euros directly from the Federal Reserve. Repeat the recording of the transaction described in parts b. and c. Has the Balance-of-Payments (deficit or surplus) been affected? Explain.

Please answer all parts. Thank you for your help.

Answer 1

Answer 5: Here in the point (a) we can find that money is coming to America as a result of its dale of wine to France, therefore it will be added into Current Account balance for the United States.

                                 Similarly, in the point (b) we can find that money is from America to Germany as a result of buying of the BMW, therefore it will be added into Financial Account balance for the United States.

                               Therefore, we can see that Balance of Payment for US will:

                                               $100 - $200

                                             = $100

                              i.e. the Balance of Payment will be negative or a deficit balance of payment.

               Now, in the point (c) we can find that only $100 is going in to Financial account of the United States and the rest of the $100 will go in as capital account ( which the German paid in Germany), therefore $100 will be added as Capital account for the US and $100 will be added into Financial Account balance for the United States.

                     Therefore, we can see that Balance of Payment for US will:

                                              ($100+$100) – ($200-$100)

                                             = $200 – 100

                                             = $200

              i.e. the Balance of Payment will be positive or a Surplus balance of payment.