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Balance of Payment Transactions Issues Case Study


Introduction

According to Caldas et al. (2007), BOP (balance of payments) is a statement that indicates what the residents of a particular country economically transact with the residents of other countries over a specified period usually one year. This statement, therefore, is a statement of both imports and exports. This statement records transactions into two accounts. These are the capital account and the current account. A balance of payment is similar to a ledger account whereby there is double entry for each transaction (Levitt & Dubner, 2005). The debit is (-) and the credit is (+). When payments are received from abroad, this is recorded as a credit transaction, and when agents abroad are paid, this is recorded as a debit transaction. Foreign direct investments (FDI) also affect the balance of payments. It should be noted that BOP is a record of a country’s transactions, through receipts and payments (Caldas et al., 2007).

Transactions and chart of accounts affected

Purchase of a Mercedes Benz C230 by a US resident

This transaction is no entry to the US balance of payment statement since it doesn’t involve international transactions. Daimler the manufacturer of Mercedes’s class of vehicles has bases in the US. Taking this into consideration, this transaction, therefore, doesn’t affect any account in the US balance of payment. It will be treated as a no-entry (Caldas et al., 2007).

Chevrolet Impala purchased by US resident

This transaction also is a no entry to the US balance of payment. This is because there was no importation or exportation of goods and also because no payments are made either to agents residing abroad or received from residents by agents abroad. Chevrolet Company is situated in the US and therefore no international transactions have been established. There is no chart of an account that is affected (Caldas et al., 2007).

Purchase of GE dryer by a foreigner

When a foreigner buys a GE dryer, this will involve international transactions since GE dryer appliance company is American-based. This, therefore, will affect the US balance of payment in the sense that money will be received from abroad, from a foreigner. This will be recorded as a credit transaction in the current account of the balance of payments. In the foreigner’s bank account, the transaction will be debited (Levitt & Dubner, 2005).

Purchase of UK stock by US resident

When this transaction takes place, it will affect the US balance of payments. This is by increasing financial capital and at the same time paying for it to the UK bank. Therefore, this will affect the capital account of the balance of payment since it will be recorded as a debit transaction. Stock is a financial asset and thus recorded as such. It will also affect the debit card since the bank will debit the amount used for this transaction (Levitt & Dubner, 2005).

Borrowing of Funds by US resident from a British broker to purchase stock

When this transaction occurs, it will involve foreign exchange since the money the British broker will lend to the US trader will be in the form of Sterling Pounds. This will first affect the OSB (official statements balance) in the US central bank. After the US resident purchases stock, the transaction will therefore be recorded as a debit entry in the capital account (Levitt & Dubner, 2005).

References

Caldas, J. C., Costa, A. N., & Burns, T. R. (2007). Rethinking economics: The potential contribution of the classics. Cambridge Journal of Economics, 31(1), 25-41.

Levitt, S. D., & Dubner, S. J. (2005). Freakonomics: A rogue economist explores the hidden side of everything. New York, NY: William Morrow.

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IvyPanda. (2021, January 30). Balance of Payment Transactions Issues. Retrieved from https://ivypanda.com/essays/balance-of-payment-transactions-issues/

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"Balance of Payment Transactions Issues." IvyPanda, 30 Jan. 2021, ivypanda.com/essays/balance-of-payment-transactions-issues/.

1. IvyPanda. "Balance of Payment Transactions Issues." January 30, 2021. https://ivypanda.com/essays/balance-of-payment-transactions-issues/.


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IvyPanda. "Balance of Payment Transactions Issues." January 30, 2021. https://ivypanda.com/essays/balance-of-payment-transactions-issues/.

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IvyPanda. 2021. "Balance of Payment Transactions Issues." January 30, 2021. https://ivypanda.com/essays/balance-of-payment-transactions-issues/.

References

IvyPanda. (2021) 'Balance of Payment Transactions Issues'. 30 January.

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