What are the main component accounts of the current account? Give one debit (-) and one
credit (+) example for each component account for the United States. ; The main components and possible examples are:
Trade in goods:
Debit: U.S. firm purchases German machine tools.
Credit: Singapore Air Lines buys a Boeing jet.
Trade in services:
Debit: An American takes a cruise on a Dutch cruise line.
Credit: The Brazilian tourist agency places an ad in The New York Times.
Income payments and receipts:
Debit: The U.S. subsidiary of a Taiwan computer manufacturer pays dividends to its
Credit: A British company pays the salary of its executive stationed in New York.
Unilateral current transactions.
Debit: The U.S.-based International Rescue Committee pays for an American
working on the Afghan border.
Credit: A Spanish company pays tuition for an employee to study for an MBA in the
What is the difference between a direct foreign investment and a portfolio foreign investment? Give an example of each. Which type of investment is a multinational industrial company more likely to make?
; A direct investment is made with the intent that the investor will have a degree of control
over the asset acquired. Typical examples are the building of a factory in a foreign
country by the subsidiary of a multinational enterprise or the acquisition of more than
10% of the voting shares of a foreign corporation.
; A portfolio investment is the purchase of less than 10% of the voting shares of a foreign
corporation or the purchase of debt instruments.
; Multinational enterprises are more likely to engage in direct foreign investment than in
What are the main components of the financial accounts? Give one debit (-) and one credit (+)
example for each component account for the United States.
; The main components and possible examples are:
Debit: Ford Motor Company builds a factory in Australia.
Credit: Ford Motor Company sells its factory in Britain to British investors.
Debit: An American buys shares of stock of a European food chain on the Frankfurt
Credit: The government of Korea buys United States treasury bills to hold as part of
its foreign exchange reserves.
Debit: A U.S. firm deposits $1 million in a bank balance in London.
Credit: A U.S. firm generates an account receivable for exports to Canada.
Classify the following as a transaction reported in a sub-component of the current account or the capital and financial accounts of the two countries involved:
(a) A U.S. food chain imports wine from Chile. Debit to U.S. goods part of current
account, credit to Chilean goods part of current account.
(b) A U.S. resident purchases a euro-denominated bond from a German company. Debit
to U.S. portfolio investment part of financial account; credit to German portfolio
investment of financial account.
(c) Singaporean parents pay for their daughter to study at a U.S. university. Credit to
U.S. current transfers in current account; debit to Singapore current transfers in
(d) A U.S. university gives a tuition grant to a foreign student from Singapore. If the
student is already in the United States, no entry will appear in the balance of
payments because payment is between U.S. residents. (A student already in the U.S.
becomes a resident for balance of payments purposes.)
(e) A British Company imports Spanish oranges, paying with eurodollars on deposit in
London. A debit to the goods part of Britain’s current account; a credit to the goods
part of Spain’s current account.
(f) The Spanish orchard deposits half the proceeds of its sale in a New York bank. A
debit to the income receipts/payments part of Spain’s current account; a credit to the
income receipts/payments part of the U.S. current account.
(g) The Spanish orchard deposits half the proceeds in a eurodollar account in London.
No recording in the U.S. balance of payments, as the transaction was between
foreigners using dollars already deposited abroad. A debit to the income
receipts/payments of the British current account; a credit to the income
receipts/payments of the Spanish current account.
(h) A London-based insurance company buys U.S. corporate bonds for its investment
portfolio. A debit to the portfolio investment section of the British financial accounts;
a credit to the portfolio investment section of the U.S. balance of payments. (i) An American multinational enterprise buys insurance from a London insurance
broker. A debit to the services part of the U.S. current account; a credit to the
services part of the British current account.
(j) A London insurance firm pays for losses incurred in the United States because of an
international terrorist attack. A debit to the services part of the British current
account; a credit to the services part of the U.S. current account. (k) Cathay Pacific Airlines buys jet fuel at Los Angeles International Airport so it can
fly the return segment of a flight segment back to Hong Kong. Hong Kong keeps its
balance of payments separate from those of the People’s Republic of China. Hence a
debit to the goods part of Hong Kong’s current account; a credit to the goods part of
the U.S. current account.
(l) A California-based mutual fund buys shares of stock on the Tokyo and London
stock exchanges. A debit to the portfolio investment section of the U.S. financial
account; a credit to the portfolio investment section of the Japanese and British
(m) The U.S. army buys food for its troops in South Asia from venders in Thailand. A
debit to the goods part of the U.S. current account; a credit to the goods part of the
Thai current account.
(n) A Yale graduate gets a job with the International Committee of the Red Cross
working in Bosnia and is paid in Swiss francs. A debit to the income part of the
Swiss current account; a credit to the income part of the Bosnia current account.
This assumes the Yale graduate spends her earnings within Bosnia; should she
deposit the sum in the United States then the credit would be to the income part of
the U.S. current account.
(o) The Russian government hires a Dutch salvage firm to raise a sunken submarine. A
debit to the service part of Russia’s current account; a credit to the service part of the
Netherlands’s current account.
(p) A Colombian drug cartel smuggles cocaine into the United States, receives a
suitcase of cash, and flies back to Colombia with that cash. This would not get
captured in the goods part of the U.S. or the Columbian current accounts. Assuming
the cash was “laundered” appropriately, from the point of view of the smugglers,
bank accounts in the U.S. or somewhere else (probably not Colombia, possibly
Switzerland) would be credited. This imbalance would end up in the errors and
omissions part of the U.S. balance of payments.
(q) The U.S. government pays the salary of a foreign service officer working in the U.S.
embassy in Beirut. Diplomats serving in a foreign country are regarded as residents
of their home country, so this payment would not be recorded in any balance of
payments accounts. If or when the diplomat spent the money in Beirut, at that time a
debit should be incurred in the goods or services part of the U.S. current account and
a contrary entry in the Lebanon balance of payments. It is doubtful that the goods or
services transaction would get reported or recorded, although on a net basis changes
in bank balances would reflect half of the transaction.
(r) A Norwegian shipping firm pays U.S. dollars to the Egyptian government for
passage of a ship through the Suez canal. If the Norwegian firm paid with dollar
balances held in the U.S. and the Suez Canal Authority of Egypt redeposited the
proceeds in the U.S. no entry would appear in the U.S. balance of payments. Norway
would debit a purchase of services, and Egypt would credit a sale of services.
(s) A German automobile firm pays the salary of its business executive working for a
subsidiary in Detroit. Germany would record a debit in the income
payments/receipts in its current account; the U.S. would record a credit in the
income payments/receipts in its current account.
(t) An American tourist pays for a hotel in Paris with his American Express card. A
debit would be recorded in the services part of the U.S. current account; a credit
would be recorded in the services part of the French current account. (u) A French tourist from the provinces pays for a hotel in Paris with his American
Express card. A French resident most likely has a French-issued credit card, issued
by the French subsidiary of American Express. In this instance, no entry would
appear in either country’s balance of payments. If, later, the French subsidiary of
American express paid a dividend back to the U.S., that would be recorded in the
income part of the current accounts.
(v) A U.S. professor goes abroad for a year and lives on a Fulbright grant. The current
transfers section of the U.S. current account would be debited for the salary paid to a
foreign resident. (Even though an American, the professor is a foreign resident
during the time he lives abroad.) The current transfers section of the host country’s
current account would be credited.
Identify the correct U.S. BOP account for each of the following transactions. (a) A German based pension fund buys U.S. government 30-year bonds for its
Financial account: portfolio investment liabilities
(b) Scandinavian Airlines System (SAS) buys jet fuel at Newark Airport for its
flight to Copenhagen.
Current account: Goods: Exports
(c) Hong Kong students pay tuition to the University of California, Berkeley.
Current account: Services: credit
(d) The U.S. Air Force buys food in South Korea to supply its air crews.
Current account: Goods: Imports
(e) A Japanese auto company pays the salaries of its executives working for its U.S.
Current account: Income: credit
(f) A U.S. tourist pays for a restaurant meal in Bangkok.
Current account: Services: debit
(g) A Colombian citizen smuggles cocaine into the United States, receives cash, and
smuggles the dollars back into Colombia.
Net errors and omissions
(h) A U.K. corporation purchases a euro-denominated bond from an Italian MNE.
Does not enter the U.S. balance of payments