1. Indicate how each of the following international transactions is entered into the U.S. balance of payments with double-entry bookkeeping:
a. A U.S. resident imports $500 worth of merchandise from a U.K. resident and agrees to pay in three months.
b. After the three months, the U.S. resident pays for his imports by drawing down his bank balances in London.
c. What is the net effect of transactions (a) and (b) on the U.S. balance of payments if they occur during the same year?
2. Indicate how each of the following international transactions is entered into the U.S. balance of payments with double-entry bookkeeping:
a. The U.S. government gives a $100 cash balance in a U.S. bank to a developing nation as part of the U.S. foreign aid program.
b. The developing nation uses the $100 bank balance to import $100 worth of food from the United States.
c. What is the net effect of transactions (a) and (b) on the U.S. balance of payments if they occur during the same year?
The developing nation uses the $100 bank balance to import $100 worth of food from the United States.
1. For each of the international transactions, we need to record both the debit and credit entries to balance the U.S. balance of payments.
a. Importing merchandise worth $500 from a U.K. resident and agreeing to pay in three months:
- Debit: Imports of Merchandise (Current Account)
- Credit: Increase in Liabilities - Trade Payables (Current Account)
b. Paying for imports after three months by drawing down bank balances in London:
- Debit: Decrease in Liabilities - Trade Payables (Current Account)
- Credit: Decrease in Assets - Bank Balances in London (Capital and Financial Account)
c. The net effect of transactions (a) and (b) on the U.S. balance of payments would be a decrease in Liabilities - Trade Payables (Current Account) and a decrease in Assets - Bank Balances in London (Capital and Financial Account).
- This indicates a decrease in the current account balance due to the payment of the import, and a decrease in the capital and financial account balance as the bank balance in London is reduced.
2. Similarly, for each international transaction, we need to record both the debit and credit entries to balance the U.S. balance of payments.
a. Giving a $100 cash balance in a U.S. bank to a developing nation as part of the U.S. foreign aid program:
- Debit: Decrease in Assets - Bank Balances (Capital and Financial Account)
- Credit: Increase in Grants or Aid (Current Account)
b. The developing nation using the $100 bank balance to import $100 worth of food from the United States:
- Debit: Increase in Imports of Merchandise (Current Account)
- Credit: Decrease in Assets - Bank Balances (Capital and Financial Account)
c. The net effect of transactions (a) and (b) on the U.S. balance of payments would be a decrease in Assets - Bank Balances (Capital and Financial Account) and an increase in Imports of Merchandise (Current Account).
- This indicates a decrease in the capital and financial account balance as the bank balance is reduced, and an increase in the current account balance due to the import of goods.
To understand how each of the given international transactions is entered into the U.S. balance of payments with double-entry bookkeeping, we need to consider the different components of the balance of payments: the current account and the capital account.
1. TRANSACTION (a):
a. A U.S. resident imports $500 worth of merchandise from a U.K. resident and agrees to pay in three months.
For this transaction, we first need to identify the entries in the balance of payments:
Current Account:
- Merchandise Imports: Import of goods from abroad, which increases the current account deficit.
Capital Account:
- No entry.
To record this transaction in double-entry bookkeeping, we will debit the Current Account for $500 under Merchandise Imports, as it increases the current account deficit. There is no corresponding entry in the capital account since no payments have been made yet.
Current Account:
Merchandise Imports: -$500
Capital Account:
No entry.
2. TRANSACTION (b):
b. After the three months, the U.S. resident pays for his imports by drawing down his bank balances in London.
Now, let's consider the next transaction:
Current Account:
- No entry.
Capital Account:
- Change in Bank Balances: Represents the transfer of financial assets between countries.
To record this transaction, we will credit the current account for $500 under Merchandise Imports, as we have now paid for the imports. Additionally, we will debit the capital account for $500 under Change in Bank Balances to represent the outflow of funds from the U.S. to the U.K.
Current Account:
Merchandise Imports: $0
Capital Account:
Change in Bank Balances: -$500
3. Net effect on the U.S. balance of payments:
c. What is the net effect of transactions (a) and (b) on the U.S. balance of payments if they occur during the same year?
To determine the net effect, we need to sum up the entries from both transactions in the balance of payments:
Current Account:
Merchandise Imports: -$500 + $0 = -$500
Capital Account:
Change in Bank Balances: $0 + (-$500) = -$500
The net effect on the U.S. balance of payments, in this case, is a decrease of $500 in both the current account and the capital account, indicating a decrease in the overall balance of payments.