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:

An American buys a share of German stock, paying by writing a check on an account with a Swiss bank.

An American buys a share of German stock, paying the seller with a check on an American bank.

A tourist from Detroit buys a meal at an expensive restaurant in Lyons, France, paying with a traveler’s check.

A California winemaker contributes a case of cabernet sauvignon for a London wine tasting.

A U.S.-owned factory in Britain uses local earnings to buy additional machinery.

Answer 1

A) There will be an entry on the debit side of US financial account when the american buys a german stock and there will be a entry on the credit side of the financial account of the countries financial account when the american pays by a check on his swiss bank account as the american will receive the amount from the swiss bank.

B)Both the entries will be in the US financial account as purchase of stock is a debit entry and the payment to seller is a credit entry

C) When the tourist buys meal there is a debit entry in the current account of US and the company which has issued traveler check has to sell its foreign asset which results in a credit entry in the US financial account.

D) There is no entry as there is no transaction

E) There is no entry in the US balance of payments as it is an offshore transaction.