Question

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 Australian credit card. (c) A U.S.-owned factory in Britain uses local earnings (i.e., in Britain) to buy additional equipment from a Britain firm.

Answer 1

(a) A U.S. resident buys shares of a Portuguese company paying via wire transfer from her Wells Fargo account to a Portuguese bank.

The US financial account is debited since the stocks were paid by a transfer from Wells Fargo bank.

The credit happens when the Portuguese bank lends the to a Portuguese company that imports goods from America.

(b) An Australian tourist rents a car in the U.S. and pays with her Australian credit card.

The payment received from the Australian tourist represents a credit in the US financial account.

The debit occurs when an American bank receiving the money from the Australian bank will then lend the money to an American company that imports goods.

(c) A U.S.-owned factory in Britain uses local earnings (i.e., in Britain) to buy additional equipment from a Britain firm.

This transaction doesn't affect the US financial account since the money was originated and spent in Britain.