Question

Explain how 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: 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 French government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy French 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 winegrower 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

The balance of payments records transactions including credit and debit entries for various international exchanges involving services, goods, financial instruments, and unilateral transfers. These transactions illustrate economic activities that impact the trade balance, current account, and financial accounts, demonstrating the complexity of international finance.

Step-by-step explanation:

The balance of payments is a record of all transactions made between entities in one country and the rest of the world over a specific period. Each transaction results in a credit and a debit in the balance of payments accounts. Here's how the given transactions generate entries in the American balance of payments accounts:

• An American buys a share of German stock, paying by writing a check on an account with a Swiss bank: Debit in the financial account (capital outflow as the payment goes out), and credit in the balance of payments (a reduction in U.S. liabilities, as the Swiss bank account is debited).
• An American buys a share of German stock, paying the seller with a check on an American bank: Debit in the financial account (capital outflow to Germany), and credit in the U.S. bank liabilities (as the bank's assets are reduced).
• The French government carries out an official foreign exchange intervention using dollars held in an American bank to buy French currency: Debit in the reserve assets of the U.S. (use of U.S. currency reserves), and credit in the financial account (decrease in foreign holdings of the dollar).
• A tourist from Detroit pays for a meal in France with a traveler's check: Debit in the current account (service import - the meal), and credit in the financial account (decrease in foreign liability as the traveler's check is used).
• A California winegrower donates wine for a London tasting: Debit in the current account (goods export without a financial counterentry, is treated as a gift), and credit in unilateral transfers (as it is a gift to the U.K.).
• A U.S.-owned factory in Britain uses local earnings to buy additional machinery: Debit in the financial account (investment abroad), and credit in the firm's reinvestment (earnings not repatriated).

These transactions reflect economic activities that affect the trade balance, the current account, and financial accounts differently, showing the intricacies of international financial flows.

Answer 2

Step-by-step explanation:

A. An American buys a share of German stock, paying by writing a check on an account with a Swiss bank. - Credit Swiss bank and Debit Capital account as purchase of German Stock

B. An American buys a share of German stock, paying the seller with a check on an American bank. Credit American bank and Debit Capital account as purchase of German Stock

C. The French government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy French currency from its citizens. Credit American bank and Debit Capital account as foreign currency exchange

D. A tourist from Detroit buys a meal at an expensive restaurant in Lyons, France, paying with a traveler's check. Credit Traveler's check (Current Account) and Debit Currency transfer (payment for service)

E. A California winegrower contributes a case of cabernet sauvignon for a London wine tasting. it has no financial implication as its a donation.

F. A U.S.-owned factory in Britain uses local earnings to buy additional machinery. No entry as the transaction has nothing to do with country's asset.