international finance econ II Balance of Payments Transactio

international finance econ

II. Balance of Payments Transactions Explain how, if at all, each of the following transactions generates two entries (a credit and a debit) in the American balance of payments accounts, and describe how each entry would be classified in any of current, financial or capital account: (a) A U.S. resident buys shares of a Portuguese company paying via wire transfer from her Wells Fargo account to a Portuguese bank. (b) An Australian tourist rents a car in the U.S. and pays with her credit card. (c) A U.S.-owned factory in Britain uses local earnings to buy additional machinery.

Solution

A.Debit in capital account.Capital account records transactions of sale and purchase of assets and liabilities. Shares, stocks and bonds are included in it.Since, the payment is made to the Portuguese company it will be a debit.

B.Credit in current account.Current account records transactions in goods and services. Since,US receives payment,it will be credit.

C. Financial account. Financial account measures increase or decrease in international ownership of assets.Asset increases in this case as more machinery is purchased.However,it won\'t be a credit/debit because local earnings are included and payments are not made to/from US