Question

Discuss how the following transactions fit into the BOP framework. Which parts of the BOP identity change and in which direction? Answer from the US perspective

a.) A Chinese company buys US Treasury securities from a broker/dealer in Sydney, Australia.
b.) A US family flies Alitalia to Milan.
c.) A US investment bank buys a German stock from a US insurance company.
d.) A Spanish mutual fund sells a Chinese company’s stock to a NY investment bank.
e.) A US company builds a factory in Malaysia.

Answer 1

A) The financial  account under BOP will create a deficit if foreigners buy US Securities which is an asset.
b) US family flies to Milan then Current account will reduce since US family is paying for airline Services in Italy.
c) No Change in BOP because the assets were already held by an US insurance company.
d) The Financial account under BOP will show a deficit because of cash outflow in acquiring stocks of foreign companies
e) If A US company builds a factory in Malaysia cash will go out for FDI from financial account creating a deficit in BOP.

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