Question

The Island of Sodor, the home of Thomas the Tank Engine, recently left the United Kingdom to become an independent country. Sodor’s new national currency is the Sodoro (₴). Below are some of Sodor’s national account transactions. Explain how each of these transactions is recorded on the balance of payments ledger of Sodor. Remember, all transactions produce two entries: a credit (+) and a debit (–). N.B., If an entry is in the current account, please specify whether it is booked as a trade balance, net factor income from abroad, or unilateral transfer in the current account.

1. Sir Topham Hatt hires a work crew from a Polish temporary-labor firm for ₴500,000 to rebuild portions of Thomas the Tank Engine’s branch line that were washed out in recent flooding.

2. The Sodor China Clay quarry sells one ton of clay to a teapot manufacturer in France and accepts as payment ₴750 worth of teapots.

3. A group of Sodor children collects ₴140 worth of bootlaces, which they donate to the Shoeless Joe Jackson Foundation in Chicago.

4. Sodor Rail acquires a foreign company, British Rail, as a foreign direct investment. Years of neglect enabled Sodor to buy it for ₴1.

5. The Italian bank, UniCredit SpA, forgives ₴10 billion debt that Sodor Rail accumulated in its disastrous acquisition of the Italian railroad, Trenitalia.

Answer 1

1) The first entry is on the debit side because Sir Topham hires labour and pays them money from his pocket. Debit implies payment or outflow of income.

2) The second will come under credit in current account as the Sodor China Clay quarry sells clay to a manufacturer in france and in turn recieves payment. Credit implies reciepts or inflow of income. the entry is in the current account and it will be booked as trade balance as it relates to export and import of product.

3) The third entry will come under debit in unilateral transfer in current account because the group of children is donating it to a foundation in chicago and it is not asking for anything in return. Unilateral transfers are one sided or unidirectional transactions. It includes grants,scholarships,donations etc.

4) This will come under debit column in capital account because it is a purchase of an asset.

5) It will be an entry in credit column in capital account.