Question

How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from the foreigner) or the financial account (as a sale of assets to or purchase of assets from a foreigner)? How will the balance of payments on the current and financial accounts change?

a. A French importer buys a case of California wine for $500.

b. An American who works for a French company deposits her paychecks, drawn on a Paris bank into her San Francisco bank

c. An American buys a bond from a Japanese company for $10,000

d. An American charity sends $100,000 to Africa to help local residents buy food after a harvest shortfall.

Answer 1

Transactions in the U.S. balance of payments are classified as current or financial account entries depending on their nature. The purchase of goods, employment income, and unilateral transfers typically affect the current account, while the acquisition of foreign assets affects the financial account.

Step-by-step explanation:

When examining the U.S. balance of payments accounts, transactions are classified according to their nature and the accounts they affect. For each transaction mentioned:

• a. The purchase of California wine by a French importer for $500 would be recorded in the current account as an export. The balance on the current account would increase through a receipt from a foreigner.
• b. An American depositing her paycheck from a French company into her San Francisco bank involves the current account because of the services she provided, leading to a change in the balance as a payment from a foreigner.
• c. The purchase of a Japanese bond by an American for $10,000 is a financial account transaction. It would be classified as a purchase of assets from a foreigner, leading to a decrease in the U.S. financial account balance.
• d. An American charity sending $100,000 to Africa corresponds to a unilateral transfer within the current account. This would be treated like an import, with a stream of payments leaving the country, resulting in a negative effect on the balance of the current account.