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solution_ps1 - International Economics: EC315 Lent Term,...

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International Economics: EC315 Lent Term, 2002 Suggested Solutions to Problem Set 1 Question 1 : The Balance of Payments: Two types of transactions are recorded in the balance of payments: - transactions that involve exports or imports of goods and services (CA) - transactions that involve the purchase or sales of assets (KA) Every transaction is automatically entered twice as a credit (+) and as a debit (-) (double entry book-keeping) Fundamental identity: CA + KA = 0 Transaction classification: Current account : credit debit Merchandise trade export import Investment income received paid Other service received paid Capital account: US assets held abroad (capital outflows): increase (-) Foreign assets held in the US (capital inflows): increase (+) Official Reserve Transaction Domestic central bank increases the amount of international reserve assets or assets in the rest of the world: debit (-) Foreign central bank increases assets in the domestic economy: credit (+) Exercise 3 (Krugman and Obstfeld chapter 12) US balance of payments entries: (a) An American purchases a share of German stock and pays by writing a cheque on an account with a Swiss bank. Debit the Capital A/C (the purchase of German stock increases US assets held abroad) Credit the Capital A/C (payment by the Swiss bank decreases US assets held abroad) 1
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(b) An American purchases a share of German stock and pays by writing a cheque on an American bank. Debit the Capital A/C (the purchase of German stock increases US assets held abroad) Credit the Capital A/C (payment by American bank increases foreign assets held in US) (c) The French government carries out an official foreign exchange intervention in which it uses dollars held in an American bank to buy French currency from its citizens. Debit the Capital A/C (sale of $ by French government decreases foreign assets held in US) Credit the Capital A/C (purchase of $ by French citizens increases foreign assets held in US) (d) A tourist from Detroit buys a meal at an expensive restaurant in France, paying with a traveler’s check. Debit the Current A/C (US imports a service)
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solution_ps1 - International Economics: EC315 Lent Term,...

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