Zulfiqar Hasan

It is important to findout the debit item and credit item of the transaction elements of Balance of Payment (BOP). Some transactions are given here. Solution of this transactions are given at the end.

a) A U.S. food chain imports sugar from Chile.
Types of Account: Current account
Debit: Debit to U.S. goods
Credit: credit to Chilean goods

b) A U.S. resident purchases a euro-denominated bond from a German company.

c) Singaporean parents pay for their daughter to study at a U.S. university.
d) A U.S. university gives a tuition grant to a foreign student from Singapore.

e) A British Company imports Spanish oranges, paying with Eurodollars on deposit in London.

f) The Spanish orchard deposits half the proceeds of its sale in a New York bank.

g) The Spanish orchard deposits half the proceeds in a Eurodollar account in London.

h) A London-based insurance company buys U.S. corporate bonds for its investment portfolio.

i) An American multinational enterprise buys insurance from a London insurance broker.

j) A London insurance firm pays for losses incurred in the United States because of an international terrorist attack.

k) Cathay Pacific Airlines buys jet fuel at Los Angeles International Airport so it can fly the return segment of a flight segment back to Hong Kong.
l) A California-based mutual fund buys shares of stock on the Tokyo and London stock exchanges.

m) The U.S. army buys food for its troops in South Asia from venders in Thailand.

n) A Yale graduate gets a job with the International Committee of the Red Cross working in Bosnia and is paid in Swiss francs.

o) The Russian government hires a Dutch salvage firm to raise a sunken submarine.

p) A Colombian drug cartel smuggles cocaine into the United States, receives a suitcase of cash, and flies back to Colombia with that cash. This would not get captured in the goods part of the U.S. or the Columbian current accounts.

q) The U.S. government pays the salary of a Foreign Service officer working in the U.S. embassy in Beirut.

r) A Norwegian shipping firm pays U.S. dollars to the Egyptian government for passage of a ship through the Suez Canal.

s) A German automobile firm pays the salary of its business executive working for a subsidiary in Detroit.
t) An American tourist pays for a hotel in Paris with his American Express card.

u) A French tourist from the provinces pays for a hotel in Paris with his American Express card.

v) A U.S. professor goes abroad for a year and lives on a Fulbright grant.

Solutions: Classifying transactions. Classify the following as a transaction reported in a sub-component of the current account or the capital and financial accounts of the two countries involved:

a) A U.S. food chain imports sugar from Chile. Debit to U.S. goods part of current account, credit to Chilean goods part of current account.

b) A U.S. resident purchases a euro-denominated bond from a German company. Debit to U.S. portfolio part of financial account; credit to German portfolio of financial account.

c) Singaporean parents pay for their daughter to study at a U.S. university. Credit to U.S. current transfers in current account; debit to Singapore current transfers in current account.

d) A U.S. university gives a tuition grant to a foreign student from Singapore. If the student is already in the United States, no entry will appear in the balance of payments because payment is between U.S. residents. (A student already in the U.S. becomes a resident for balance of payments purposes.)

e) A British Company imports Spanish oranges, paying with Eurodollars on deposit in London. A debit to the goods part of Britain’s current account; a credit to the goods part of Spain’s current account.

f) The Spanish orchard deposits half the proceeds of its sale in a New York bank. A debit to the income receipts/payments part of Spain’s current account; a credit to the income receipts/payments part of the U.S. current account.

g) The Spanish orchard deposits half the proceeds in a Eurodollar account in London. No recording in the U.S. balance of payments, as the transaction was between foreigners using dollars already deposited abroad. A debit to the income receipts/payments of the British current account; a credit to the income receipts/payments of the Spanish current account.

h) A London-based insurance company buys U.S. corporate bonds for its investment portfolio. A debit to the portfolio investment section of the British financial accounts; a credit to the portfolio investment section of the U.S. balance of payments.

i) An American multinational enterprise buys insurance from a London insurance broker. A debit to the services part of the U.S. current account; a credit to the services part of the British current account.

j) A London insurance firm pays for losses incurred in the United States because of an international terrorist attack. A debit to the services part of the British current account; a credit to the services part of the U.S. current account.
k) Cathay Pacific Airlines buys jet fuel at Los Angeles International Airport so it can fly the return segment of a flight segment back to Hong Kong. Hong Kong keeps its balance of payments separate from those of the People’s Republic of China. Hence a debit to the goods part of Hong Kong’s current account; a credit to the goods part of the U.S. current account.

l) A California-based mutual fund buys shares of stock on the Tokyo and London stock exchanges. A debit to the portfolio investment section of the U.S. financial account; a credit to the portfolio investment section of the Japanese and British financial accounts.

m) The U.S. army buys food for its troops in South Asia from venders in Thailand. A debit to the goods part of the U.S. current account; a credit to the goods part of the Thai current account.

n) A Yale graduate gets a job with the International Committee of the Red Cross working in Bosnia and is paid in Swiss francs. A debit to the income part of the Swiss current account; a credit to the income part of the Bosnia current account. This assumes the Yale graduate spends her earnings within Bosnia; should she deposit the sum in the United States then the credit would be to the income part of the U.S. current account.

o) The Russian government hires a Dutch salvage firm to raise a sunken submarine. A debit to the service part of Russia’s current account; a credit to the service part of the Netherlands’s current account.

p) A Colombian drug cartel smuggles cocaine into the United States, receives a suitcase of cash, and flies back to Colombia with that cash. This would not get captured in the goods part of the U.S. or the Columbian current accounts. Assuming the cash was “laundered” appropriately, from the point of view of the smugglers, bank accounts in the U.S. or somewhere else (probably not Colombia, possibly Switzerland) would be credited. This imbalance would end up in the errors and omissions part of the U.S. balance of payments.

q) The U.S. government pays the salary of a Foreign Service officer working in the U.S. embassy in Beirut. Diplomats serving in a foreign country are regarded as residents of their home country, so this payment would not be recorded in any balance of payments accounts. If or when the diplomat spent the money in Beirut, at that time a debit should be incurred in the goods or services part of the U.S. current account and a contrary entry in the Lebanon balance of payments. It is doubtful that the goods or services transaction would get reported or recorded, although on a net basis changes in bank balances would reflect half of the transaction.

r) A Norwegian shipping firm pays U.S. dollars to the Egyptian government for passage of a ship through the Suez Canal. If the Norwegian firm paid with dollar balances held in the U.S. and the Suez Canal Authority of Egypt redeposited the proceeds in the U.S. no entry would appear in the U.S. balance of payments. Norway would debit a purchase of services, and Egypt would credit a sale of services.

s) A German automobile firm pays the salary of its business executive working for a subsidiary in Detroit. Germany would record a debit in the income payments/receipts in its current account; the U.S. would record a credit in the income payments/receipts in its current account.

t) An American tourist pays for a hotel in Paris with his American Express card. A debit would be recorded in the services part of the U.S. current account; a credit would be recorded in the services part of the French current account.

u) A French tourist from the provinces pays for a hotel in Paris with his American Express card. A French resident most likely has a French-issued credit card, issued by the French subsidiary of American Express. In this instance, no entry would appear in either country’s balance of payments. If, later, the French subsidiary of American express paid a dividend back to the U.S., that would be recorded in the income part of the current accounts.

v) A U.S. professor goes abroad for a year and lives on a Fulbright grant. The current transfers section of the U.S. current account would be debited for the salary paid to a foreign resident. (Even though an American, the professor is a foreign resident during the time he lives abroad.) The current transfers section of the host country’s current account would be credited.