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. An American buys a share of German stock, paying by writing a check on an account with a Swiss bank.
b. An American buys a share of German stock, paying the seller with a check on an American bank.
c. The Korean government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy Korean currency from its citizens.
d. A tourist from Detroit buys a meal at an expensive restaurant in Lyons, France, paying with a traveler's check.
e. A California winemaker contributes a case of cabernet sauvignon for a London wine tasting.
f. A U.S.-owned factory in Britain uses local earnings to buy additional machinery.

Answer 1

a. An American buys a share of German stock, paying by writing a check on an account with a Swiss bank.

• One foreign asset is traded for another, so US financial account is not affected

b. An American buys a share of German stock, paying the seller with a check on an American bank.

• US financial account is debited when the stock is purchased and credited when the German bank lends money to a German importer that imports American goods.

c. The Korean government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy Korean currency from its citizens.

• The US financial account is debited when the Korean government uses US dollars to buy Korean currency. It is credited when Korean citizens use the dollars to import American goods.

d. A tourist from Detroit buys a meal at an expensive restaurant in Lyons, France, paying with a traveler's check.

• The US financial account is debited when the meal is paid. Depending on which bank, French or American, issued the traveler's check, the US financial account will be credited differently. If an American bank issued the traveler's check, the case is similar to (a), but if a French bank issued the traveler's check, the US financial account will be credited when the French bank sells assets to replace the traveler's check.

e. A California winemaker contributes a case of cabernet sauvignon for a London wine tasting.

• No transaction occurred.

f. A U.S.-owned factory in Britain uses local earnings to buy additional machinery.

• One foreign asset is traded for another, so US financial account is not affected