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Lecture 13

ECON 4550 Lecture Notes - Lecture 13: Natural Disaster, Cabernet Sauvignon, Wine Tasting


Department
Economics
Course Code
ECON 4550
Professor
F.Koray
Lecture
13

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13.3 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:
a. An American buys a share of German stock, paying by writing a check on
an account with a Swiss bank
Purchase of German stock= Debit to Financial Account
Sale of Swiss holdings= Credit to Financial Account (Swiss holdings
decrease)
b. An American buys a share of German stock, paying the seller with a check
on an American bank
Purchase of German stock= Debit to Financial Account
Payment with U.S. currency= Credit
*Could be used to demand U.S. goods (record on CA) or Financial Assets
(record on FA)
c. The Korean government carries out an official foreign exchange
intervention in which it uses dollars held in an American bank to buy Korean
currency from its citizen.
Sale of U.S. asset to Japanese= Debit to FA
Increase of U.S. currency in Japanese market= Credit
*Could be used to demand U.S. goods (record on CA) or Financial Assets
(record on FA)
d. A tourist from Detroit buys a meal at an expensive restaurant in Lyons,
France, paying with a traveler’s check.
Purchase of meal abroad by American= Debit to Current Account
Payment of U.S. Assets= Credit to Financial Account
e. A California winemaker contributes a case of cabernet sauvignon for a
London wine tasting
no market transaction made, no entries required
f. A U.S.-owned factory in Britain uses local earnings to buy additional
machinery.
no U.S. assets were used so no entry
13.5 The nation of Pecunia had a current account deficit of $1 billion and a
nonreserve financial account surplus of $500 million in 2008.
a. What was the balance of payments of Pecunia in that year? What happened
to the country’s net foreign assets?
-$500 million
had to fall by $1 billion to accommodate the $1b CA deficit
b. Assume that foreign central banks neither buy nor sell Pecunian assets.
How did the Pecunian central bank’s foreign reserves change in 2008? How
would this official intervention show up in the balance of payments accounts
of Pecunia?
The Pecunia Central Bank would have to sell its foreign reserves to
cover the $500m BOP deficit. This would be recorded as positive
Pecunia dollar inflow on the BOP
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