Chapter 11
The Balance of Payments
This chapter introduces the balance of payments. Alternative summary measures are presented and
discussed in terms of what they may offer for policy evaluation. Students often have a difficult time
learning how to classify transactions. Those who have not had an accounting course will require a patient
explanation of double-entry bookkeeping. A thorough drill on classifying transactions in a hypothetical
balance of payments is a necessity to ensure that the material is understood.
The text presents balance of payments data as found in the Survey of Current Business and Federal
Reserve Bank of St. Louis International Economic Conditions.
◼ Chapter Outline
Introduction
1. Identify whether each of the following is a debit or a credit in the country of Freedonia’s BOP
and indicate where the item would be classified.
a)
Freedonian firms export $250 million worth of goods.
b)
Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.
c)
A Freedonian firm purchases a shoe factory in Mexico for $30 million.
d)
Freedonia receives $5 million in foreign aid from the United States.
e)
Freedonian citizens deposit $15 million in Citibank account in New York.
f)
Freedonia imports $220 million worth of goods.
g)
Freedonian firms borrow $45 million by issuing bonds in the United States.
3. Consider each of the following events. For each, identify whether it should be included in the U.S.
BOP table; where relevant, determine whether it is a debit or credit entry; and calculate the
statistical discrepancy entry for the U.S. BOP table.
a. Ford imports $200 million worth of engines made in its motor plant in Toronto.
b. Boeing sells 10 767's worth $500 million to Swiss Air.
c. Americans earn $15 million in interest payments on UK government bonds.
d. Microsoft pays $5 million in dividends to stockholders in Japan.
e. The U.S. government distributes $50 million in foreign aid.
f. GM buys Toyota for $1 billion.
g. British Petroleum buys Exxon for $750 million.
h. While on vacation in France, a Pittsburgh resident has her paycheck direct
deposited to her PNC bank account.
Chapter 11 The Balance of Payments 51
6. Suppose that foreigners decided that financial investments in the United States were not a good
idea. What would they do? What effect would these actions have on the value of the dollar and
U.S. interest rates?
7. Japan has run large current account surpluses for much of the past two decades, yet no one ever
asks if these surpluses are sustainable. Why are surpluses treated differently than deficits?
8. Use the information in the following table on Switzerland’s international transactions to answer the
following questions (amounts are millions of U.S. dollars):
Balance of Payments Account
Amount
Merchandise imports
$92,871
Merchandise exports
$93,859
Services imports
$15,406
Services exports
$26,683
Investment income receipts
$43,720
52 Husted/Melvin • International Economics, Ninth Edition