Question

Categorize each transaction according to the U.S. account to which it belongs and the direction the money flows.AccountDirection of flowAn Australian company buys steel from a U.S. firm.The Federal Reserve buys $2 billion worth of euros.Profits are earned by a U.S. based mining company operatingin Mexico.An English company purchases a U.S.confectionary manufacturer.Financial accountPayment from foreignersFactor incomePayment to foreignersPayment from foreignersCurrent accountFinancial accountCurrent account

Answer 1

a. If an English company purchases a U.S. confectionary manufacturer, payments from foreigners flow into the U.S. financial account.

b. If profits are earned by a U.S.-based mining company operating in Mexico, payments from foreigners flow into the U.S. current account.

c. If the Federal Reserve buys $2 billion worth of euros, payments to foreigners flow into the U.S. financial account.

d. If an Australian company buys steel from a U.S. firm, payments from foreigners flow into the U.S. current account.

Step-by-step explanation:

Factor income includes wages, corporate profits, or any payment to owners of capital. An example of this is the profits earned in Mexico by the U.S. mining company. These profits are a payment from foreigners. This transaction is accepted for in the current account.

Sales and purchases of goods and services are often the biggest line item in the current account. The payment from Australia to the United States for steel falls into this account.

Private sales and purchases of assets include the exchange of any assets that create a future liability, such as the purchase of stocks or the purchase of a corporate entity. The English company's purchase of a U.S. confectionary manufacturer falls into the financial account.

Official asset sales and purchases are those purchases of assets, such as currency reserves, made by central banks. The Federal Reserve's purchase of $2 billion worth of euros falls into the financial account.

International transfers include direct monetary transfers into or out of the United States. This includes money sent by immigrants to family members in their native country. This question does not include an example of transfers.

Answer 2

Financial account transactions are those that involve capital goods or purchases.

The Current account is for goods and services.

1. Australian company buys steel from a U.S. firm. - Current Account. Payment from foreigners.

This is a purchase of a good being steel and the payment was made by foreigners to a U.S. firm.

2. The Federal Reserve buys $2 billion worth of euros. Financial Account. Payment to foreigners.

This is a capital flow involving the purchase of another currency. It was done by paying foreigners.

3. Profits are earned by a U.S. based mining company operating in Mexico. Current Account. Payment from foreigners.

These profits were made from business operations offering goods and services so is for the current account. The profits was made from Mexico so is a Payment from foreigners.

4. An English company purchases a U.S. confectionery manufacturer. Financial Account. Payment from Foreigners.

The English company invested in owing the confectionery manufacturer so this is a capital transaction. It involved a foreign company paying a U.S. company so is a payment from foreigners.