Question

ECO 345 – BOP Assignment Determine how each of the following transactions are entered into the US balance of payments?

2. China’s Central Bank (The People’s Bank of China) sells $5 billion’s worth of US government
bonds in the open market. All the bonds are purchased by the US Federal Reserve Bank.

3. The US Toyota Corporation imports 20,000 cars from Japan’s Toyota Company. The value of
these cars is $300, 000,000. One half of this amount is paid by a loan from Bank of America. The
other half is financed by a loan from Toyota of Japan which would have to be paid back in six
months.

4. The US government gives $300 million in security aid to Ukraine.
Ukraine uses the money to purchase military hardware from American companies.

5. Germany’s BMW builds an assembly plant in South Carolina. The value of this investment has
been estimated to be $200 million and is financed by Deutsche Bank.

Answer 1

There are some points to remember before doing this,

Any transaction that will make money enter in the country ( USA) will be entered as credit and transportation that will make money leaving the country will be entered as debit.

Any transaction that is related to change in capital and liabilities will enter in capital account and apart from that transaction that is not related to change in capital and liabilities will enter in current account .

2) government bonds are financial capital. China selling bonds to federal reserve is a capital transaction so it will enter in capital account. And money is going out of country,so it will enter as debit.

This will enter as debit of 5 billion in capital account as FPI.

3)there will be two entries in this scenario.

First 300 million debit in current account under imoorts

Second 150 million credit in capital account under private short term loans from abroad.

4)again there will be two entries.

First 300 million debit on current account ( it is not loans so there is no liabilities or capital change )as transfer transcripts.

Second 300 million credit in current account as exports.

5)there will single entry of 200 million as credit in capital account as FDI.