Question

(4) (6 points, 2 points each) What is the impact (increase or decrease and amount) of each of the following events on the US Current Account and the US Capital Account? (a) In the US, the US company Best Buy purchases $1 million worth of TVs from the Korean company Samsung using US dollars. Samsung keeps the US dollars and does not exchange them for another currency. (b) Best Buy purchases $1 million worth of TVs from the Samsung corporation, using U.S. dollars. Samsung then trades its dollars to a third party for won the Korean currency (c) Best Buy trades $1 million for Korean won and then uses the won to buy TVs from Samsung

Answer 1

Ans-a The u.s company best buy is importing the visible items. It will have a negative effect on the current account because it results in outflow of domestic currency. As a result current account will decreased by $1million.The capital account tracks payments for financial assets. Because the currency is held by the Korean company, the U.S. capital account increases by $1,200.

Ans- b U.S. current account: $1 million subtracted
U.S. capital account: $1 million added

Ans-c U.S current account: $1 million gets reduced because of import of visible item.

U.S capital account:$1 million added

The change in the capital account is also the same in all three examples, even though the currency is changing hands in different ways. At the end of all these scenarios, $1 million of U.S. currency that was originally held in the United States (by Best Buy) has ended up with a foreign company. In the U.S. capital account, this counts as a purchase of currency, so the $1 million is added to the capital account.