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What are the main component accounts of the current account

By Jason Jackson,2014-06-10 20:31
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What are the main component accounts of the current account

BOP

    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

    parent.

    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

    United States.

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    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

    portfolio investment.

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:

    Direct investment.

    Debit: Ford Motor Company builds a factory in Australia.

    Credit: Ford Motor Company sells its factory in Britain to British investors.

    Portfolio investment.

    Debit: An American buys shares of stock of a European food chain on the Frankfurt

    Stock Exchange.

    Credit: The government of Korea buys United States treasury bills to hold as part of

    its foreign exchange reserves.

    Other investment.

    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.

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    (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

    current account.

    (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.

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    (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

    financial accounts.

    (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.

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    (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

    investment portfolio.

    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.

    subsidiaries.

    Current account: Income: credit

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(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

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