ECN340: Global Macro Issues
Dr. Allen J. Wilkins
August 28, 2006
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Prob. Set 10 -ans.
B O P Acco u n ts & Acco u n tin g
Office: 254 Corbly Hall
Office Phone: 696-3351
e-mail: Wilkins@Marshall.edu
What is meant by the balance of payments?
The balance of payments is a record of all economic transactions (recorded in the home country’s currency)
between residents of one country with residents of the ROW for a period of one year.
In what way is the balance of payments a summary statement?
The BOP categorizes international transactions (goods, services, investment income, unilateral transfers, asset
purchases, and official settlements) and allows us to see how transactions within each category change over
time. This allows government policymakers to evaluate our international position as they formulate fiscal,
monetary and trade policy.
What is meant by an international transaction?
It is an economic transaction (exchange of goods, services, assets) between a resident of the domestic
country and a foreign resident.
How is residency determined?
Any individual, business, or government agency that makes a particular country its legal domicile is treated as a
resident of that country for balance of payments purposes.
Why is a time period required when measuring a nation’s balance of payments?
Since transactions take time to complete, a time period is required ig f we are to measure the rate of flow of
goods, services, and assets between one country and the rest of the world.
What is a credit transaction? What is a debit transaction?
A credit transaction involves the disposal of a U.S. good, service or asset to a foreign resident. Credit
transactions include exports of goods and services, unilateral transfers from the US to foreigners, investment
income paid to foreigners, and sale of U.S. assets to foreigners. A debit transaction takes place when a US
resident acquires a good, service or asset from a foreign resident. Debit transactions include imports of goods,
and services, unilateral transfer payments from foreigners to U.S. citizens, investment income received from
foreign sources, and purchases of foreign assets by U.S. citizens.
What is double-entry bookkeeping?
Double entry bookkeeping, records each transaction twice, once as a debit and once as a credit.
What does the entry called “statistical discrepancy” refer to? How does a statistical discrepancy arise?
The statistical discrepancy insures that the BOP accounts balance. A statistical discrepancy arises because
statisticians are not able to simultaneously record both sides of every transaction. Also, the data collection
process used in BOP accounting is not exact; some information must be estimated, some transaction are
recorded inaccurately. These errors are particularly likely to occur with international capital flows.
What categories of transactions are entered into the current account of the BOP?
The current account of the BOP accounts measures the net value of all debit and credit transactions involving
goods, services, investment income, and unilateral transfers.
The balance of international indebtedness records a country’s international trade position at a point in time.
True-False-Uncertain: Explain
False A country’s international trade position is measured over a period of time (typically one year). The
Balance of International Indebtedness measures the stock of international assets and liabilities at a single
point in time.
What effect does a deficit on the current account of the balance of payments have on the balance of international
indebtedness? Would a deficit on the capital account have the same effect?
A deficit on the current account of the BOP adds to a country’s balance of international indebtedness by the amount of the
deficit. If, however, the deficit is on the capital account, this implies that there is a surplus on the current account, so it
reduces a country’s international indebtedness by the amount of the deficit.
Under what circumstances should the U.S. be concerned about running a current account deficit?
Whenever the deficit reaches a level that will generate future interest and principal obligations that the U.S.
will be unable to finance without imposing restrictions on the domestic economy.
Is it desirable to run a (large) surplus on the current account of the balance of payments? Would the U.S. always be
better off to run large surpluses on the current account?
No. Large surpluses on the current account of the balance of payments signify that the U.S. is investing in the
rest of the world, but this foreign investment can come at the expense of domestic investment. Also, there is
risk of default associated with foreign investment. Finally, large CA surpluses imply that at least some of our
trading partners are having to run CA deficits.
14.
In the following exercise, use double-entry bookkeeping to record the debit and credit side of each of the following
transactions in the appropriate categories of your personal BOP statement with the rest of the world.
T ransactions
a. R eceive W eekly Paycheck
b. R eceive interest on G ovt. Bonds
c. Pay weekly rent
$ 400
$ 20
$ 120
d. Buy food
$ 150
D isposal
Current Account
e. C ontribute to IR A (for retirement)
f. T wo year bank loan (for auto repair)
g. Birthday present for nephew
$ 80
$1200
$ 30
Acquisition
(credit)
(debit)
Goods
Buy food
-$150
S ervices
W ork for Em ployer
$400
Apartm ent rental
-$120
Inc. on Investm ents
Loan to Govt. (Bonds)
U nilateral T ransfers
Birthday present for nephew
C apital Account
A ssets (short term )
$ 20
(credit)
Receive W eekly Paycheck
-$400
Receive interest on Govt. Bonds
-$ 20
Pay weekly rent
$120
Pay Grocery bill
$150
Pay broker for IRA
$ 30
(debit)
$80
Birthday present for nephew
A ssets (long term )
$ 30
Check from Bank
$1200
IRA acquisition (for retirem ent)
$80
Sign Two year bank loan
$1200
15.
Suppose that you are given the sequence of transactions listed below. Use the BOP double entry bookkeeping
rules to classify both the credit and debit side of each transaction.
a.
A U.S. firm imports $500 worth of goods from a U.K. resident and agrees to pay for it in three months.
This transaction produces in a debit entry under merchandise trade, and a credit entry on the capital
account (b/c the U.S. firms agreement to pay $500 in three months is a short-term asset).
b.
After three months, the U.S. firm pays for his imports by drawing a check on his bank balances in London.
This transaction produces a debit entry on the capital account because the U.S. firm redeemed its promise
to pay $500 in three months, and it produces a credit entry on the capital account (short term) because the
U.S. firm disposed of a short-term asset (bank deposits held in London) .
16.
Explain how each of the following transactions is entered into the U.S. balance of payments accounts
using double entry bookkeeping.
a.
A U.S. citizen purchases $1,000 of foreign stock and pays for it with a check.
The transaction produces a debit entry on the capital account (short-term) reflecting the
acquisition of a foreign stock by a U.S. resident, and a credit entry on the short-term capital
account reflecting the disposal of U.S. assets
b.
A U.S. resident receives a foreign currency check (equivalent to $100) dividend payment on her
foreign stock, which she deposits into her account with a foreign bank.
This transaction produces a debit entry on the capital account (the acquisition of cash). It is also
recorded as a credit entry on the current account under income on investments (disposal of a
service-- loaning money to a foreign resident).
c.
A foreign investor purchases $400 of U.S. treasury bills and pays for them with a check drawn on
bank balances which he holds in the United States.
The transaction produces a $400 credit entry on the capital account for the disposal of a U.S.
asset to a foreign investor, and a $400 debit entry on the capital account.
d.
At maturity, a foreign investor receives a check of $440 from the U.S. Treasury ($400 for
principal and $40 interest payment) and deposits this check in his domestic bank account.
For the U.S., this transaction produces a $440 credit entry on the capital account reflecting the
disposal of cash to a foreign resident. It also produces two debit entries. One is a $400 debit
entry on the capital account reflecting the Treasury’s acquisition (redemption)of it’s T-bills. The
other is a $40 debit on the current account (under investment income) reflecting the acquisition
of a service (the $400 loan from a foreign resident).