Extensive summary of the exercises for the course International Monetary Economics solved during the WPO's. Suitable for students from the 3rd Bachelor of Applied Economics and Commercial Engineer. Given by L. Van Hove at the Vrije Universiteit Brussel in the academic year . The summary is in Engl...
,1. Chapter 2: Problems (and how to solve them)
Three types of problems:
• Use national income identity to demonstrate links between variables
• BOP accounts
o Interpret real-life BOP accounts
o Register one or more international transactions in BOP accounts
1.1. PROBLEM 2-3
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.
We are going to use the scheme
presented in an earlier module at all
times, it gives us all the possibilities
that can arise.
The first leg of the transaction is:
• ‘An American buys a share of German stock’
o This is a financial transaction
o Using the FA, not the CA
• When an American buys a German stock it is an import of assets
o Debit (-) side
• We are working on the Non-reserve FA, the investor isn’t a CB.
Shown is the solution for the first leg of
the transaction. This can be justified in
3 ways: (1 is enough)
• Import of an asset
• Increase in volume of US-owned
foreign assets
• Capital outflow
The second leg of the transaction is:
• ‘paying by writing a check on an account with a Swiss bank.’
o This is a financial transaction
o Using the FA, not the CA
• Double entry bookkeeping tells us that this transaction is going on the credit
(+) side
o The first leg of the transaction is on the debit side
PAGE 1
, Shown is the solution for the second leg of the transaction. This can be justified in 3 ways:
(1 is enough):
• Export of an asset
• Decrease of US-owned foreign assets
(because the money comes from a Swiss
bank account)
• Capital inflow
(imagine the investor exchanging swiss
francs for dollars he uses to pay for the
German stock)
1.2. PROBLEM 2-4
A New Yorker travels to New Jersey to buy a $100 telephone answering machine. The New
Jersey company that sells the machine then deposits the $100 check in its account at a
New York bank. How would these transactions show up in the balance of payments
accounts of New York and New Jersey?
• The physical leg of the transaction will appear in the CA for both states.
o On New York’s BOP accounts: import of an asset
▪ Debit (-)
o On New Jersey’s BOP accounts: export of an asset
▪ Credit (+)
• The second part goes on the FA
o On New York’s BOP accounts: increase of NJ-owned NY assets
▪ Credit (+)
o On New Jersey’s BOP accounts: increase of NJ-owned NY assets
▪ Debit (-)
PAGE 2
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