Question

Consider the following hypothetical transactions of the Balance of Payments of Country A: 1. Country A's firms export to Country B $100 worth of grain 2. Country A's firms import from Country C $500 worth of steel 3. Country A's residents buy Country C's government bonds for $1000 4. Country A's workers resident in Country B receive $500 in wages 5. Country A's residents receive $50 in interest from Country C's bonds they owned 6. Country A's residents pay $100 in dividends on Country C's investments in Country A 7. Country A's central bank acquires $1000 worth of Country C's currency What is the net contribution to the Current Account Balance of Country A of these entries? You need to select the entries that constitute current account entries, and then decide which one are credits and which one are debits. Finally, sum up the contributions of these entries.

Answer 1

Answer:

The net contribution to the Current Account Balance of Country A is $50

Explanation:

The credit entries include those entries which bring the money into the economy whereas the debit entries are those entries in which the expenses are more incurred or we can say more outflow of cash is there.

The debit and credit entries are shown below:

Debit entries:

1.  Country A's firms import from Country C $500 worth of steel

2. Country A's residents buy Country C's government bonds for $1000

3.  Country A's residents pay $100 in dividends on Country C's investments in Country A

Credit entries:

1. Country A's firms export to Country B $100 worth of grain

2. Country A's workers resident in Country B receive $500 in wages

3. Country A's residents receive $50 in interest from Country C's bonds they owned

4. Country A's central bank acquires $1000 worth of Country C's currency

Now the net contribution of the current account balance would be

= Total credit balance - total debit balance

= $100 + $500 + 50 + $1,000 - $500 - $1,000 - $100

= $50

The negative amount represents debit balance whereas the positive amount reflect a credit balance