Question

1. Identify whether each of the following is a debit or a credit in the country of Freedonia’s BOP and indicate where the item would be classified.

a. Freedonian firms export $250 million worth of goods.

b. Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.

c. A Freedonian firm purchases a shoe factory in Mexico for $30 million.

d. Freedonia receives $5 million in foreign aid from the United States.

e. Freedonian citizens deposit $15 million in a Citibank account in New York.

f. Freedonia imports $220 million worth of goods.

g. Freedonian firms borrow $45 million by issuing bonds in

the United States.

h. U.S. firms earn (and repatriate) $5 million in profits from

operations in Freedonia.

i. The Freedonia central bank buys $10 million in U.S.

Treasury bills.

2. In the previous example, suppose that these are all of the

entries in Freedonia’s BOP table. Calculate the value of errors

and omissions.

Answer 1

a. Freedonian firms export $250 million worth of goods.

Reason- Credit, Merchandise export. Since it is export money flows in the country, hence it is credit. Goods→Merchandise.

b. Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.

Reason- Debit, Import services. Purchase of flight tickets means import of services. Money goes out of the country, hence it is debit.

c. A Freedonian firm purchases a shoe factory in Mexico for $30 million.

Reason- Debit, financial outflow. Purchase of factory is FDI.Money goes out of the country, hence it is debit.

d. Freedonia receives $5 million in foreign aid from the United States.

Reason- Credit, unilateral transfer. Foreign aid is transfer of money in the country hence it is credited.

e.Freedonian citizens deposit $15 million in a Citibank account in New York.

Reason- Debit, Financial outflow. Deposit in a foreign bank is outflow of money.Money goes out of the country, hence it is debit.

f. Freedonia imports $220 million worth of goods.

Reason- Debit, Merchandise importt. Since it is import money flows out of the country, hence it is debit. Goods→Merchandise.

g. Freedonian firms borrow $45 million by issuing bonds in

the United States.

Reason- Credit, financial inflow. Freedonian firm borrows money from US hence money flow in the country. It is credit.

h. U.S. firms earn (and repatriate) $5 million in profits from

operations in Freedonia.

Reason- Debit, income payments. US firms take money earned in Freedonia to US. Hence it is debit.

i. The Freedonia central bank buys $10 million in U.S.

Treasury bills.

Reason- Debit, financial outflow. Freedonian bank buys US bond so money goes out, i.e. financial outflow. Therefore it is debit entry.