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The Balance of Payments
Accounting exercises
1) An American company imports 50,000 dollars worth of shoes from his French supplier. He pays by borrowing 12month euros from the Société Générale in Paris. The interest rate is 5%
The import of goods represents a potential cash outflow (in the future it can turn into actual cash outflow). It is
recorded as a minus sign in the import account. On the other side of the balance of payment, this transaction is a source
of fund as cash inflow entered into the country; it gives rise to a liability and is recorded with a positive sign (credit) on
the Short Term Liabilities account.
2) One year later, the loan is reimbursed with euros purchased from a bank in the US.
The loan is reimbursed with $2,500 of interest. The $2,500 of interest is a cash outflow due to investment expense. To
be recorded as debit (negative) in the Investment Income account.
The $50,000 loan reimbursement is a use of fund, it decreases the liabilities. It is recorded as a debit (minus) of the
Short Liabilities account. The euros purchased from a bank in the US and sent out to the French bank represents a
decrease in foreign assets. It is recorded as a credit in the Short Term Claims account.
3) An American exporter sells 500,000 dollars worth of cars to Russia. The cars are billed in euros. The exporter
accepts the equivalent in cash of 50,000 dollars in euros and a 6 month draft for the rest.
The export of goods represents a potential cash inflow (in the future it can turn into actual cash inflow). It is recorded
with a positive sign in the export of goods account.
On the other side of the balance of payment, $450,000 is recorded as short term claim on debit side (-). It is a use of
funds. The cash doesn’t not actually enters into the US economy. Instead the US economy through the American
exporter has a claim onto Russian importer.
The €50,000 is also a short term claim on the Eurozone. Us dollars cash do not enter into the economy. Instead euros
are stored into a banking account. The American exporter can ask to be repaid in dollar if he wishes so. $50,000 is
recorded as short term claim on debit side (-).
4) The exporter discounts the draft with a bank situated in the UK where he leaves the product of the transaction
(interest rate = 5%).
He pays 5% x 450,000 = $22,500 as interest to be paid immediately. This is an investment expense: to be recorded as a
debit (-) in the investment income account.
The initial $450,000 6 month draft recorded as short term claim is netted off on the credit side of the Short term claims
account and replaced by $450,000 - $22,500 = $427,500 worth of euro deposit to be recorded as short term claim on the
debit (-) side of the Short term claim account (actual us dollar do not enter the US economy, it’s a use of fund)
5) Bubba, a US resident, visits Poland. He leaves the US with 1,000 dollars and returns with 150 dollars. He spent 750
dollars for the hotel and food and the rest on shirts for himself.
Shirts sold in retail outlets are recorded in the service account. It’s the shopkeeper retailing activity (service) that is
bought (recorded). It is recorded as an import of service on the debit (-) side of the service import account.
The $850 left in Poland, are a claim hold by Polish (first by hotel, restaurants, retailers, then by Polish banks) onto the
US Central Bank. Polish banks could go to the US Central bank and ask for Zlotys. It’s a ST liability for the USA. It is
recorded as a credit (+) on the Short Term Liabilities account.
6) Juan, a resident of Mexico, becomes a resident of the US. He leaves his family in Mexico and brings 100 dollars
worth of pesos with him. He sells these pesos to an American bank.
Since Juan becomes a US resident, the pesos he brings into the USA are considered as unrequited transfer.
From a real current account point of view, it’s a cash inflow into the USA so it is recorded with a positive sign in the
unrequited transfer account.
On the other side, from a financial capital account point of view, it increased foreign assets (MXP). The US bank now
has a claim on the Mexican Central Bank (it is recorded as a debit with a minus sign in the ST claims account).
7) Juan begins to work. He sends 125 dollars to his family in Mexico. The money is sent by check drawn on his
American bank.
From a real current account point of view, again it is an unrequited transfer. Here it is an outflow, recorded as a minus.
On the other side, from a financial capital account point of view, the US bank has a liability on the Mexican family
living in Mexico. It is a source of fund for the US economy provided it is not converted into MXP. This is recorded as a
credit (+) in the ST liability account.
8) ABC, an American company, opens a subsidiary in Belgium for a cost of 120,000 dollars. Half is paid by a check
drawn on an American bank and the other half is financed with a long term bond issued by the parent company. The
bonds are sold to Swiss residents.
It’s a foreign direct investment (when you invest abroad for running a business oversea as opposed to financial
investment). It’s an outflow for the USA and has to be recorded with a minus sign in the direct investment account.
It is partly financed with a check drawn on a US bank: it is a liability for the US bank, to be recorded as a credit (+) in
the ST liability account for $60,000.
The long term bond issued to Swiss residents is a LT liability to be recorded as a credit (+) for $60,000.
9) ABC's factory in Belgium makes the equivalent of a 3000 dollar profit in the first quarter.
1500 dollars worth of euros are distributed as a dividend to the parent company. The rest is held as retained earnings.
Current account: the $3,000 is an investment income likely to generate cash inflow if converted and repatriated and
therefore is to be recorded with positive sign in the investment income account.
Capital account: $1,500 worth of euros is repatriated to the parent company. These $1,500 worth of euros dividends is
and American claim on the Eurozone. It is a ST claim and is to be recorded as debit (-) since it is a use of fund (actual
US dollar do not flow into the US economy because they are not converted but rather left in euros). It is an increase in
foreign assets.
The remaining $1,500 that is reinvested is to be recorded as a foreign direct investment with a negative sign (it is an
outflow, a use of fund). It is an increase in foreign assets.
10) The US Central Bank (the Fed) sells 1,000,000 dollars to an English bank for sterling.
These are purely financial transactions; the current account is not concerned.
It’s a use of funds, these are actual outflows of US dollars to the UK: to be recorded in the change in reserves account
on the debit side (-) since it is an increase in foreign assets (sterling).
This increase in foreign assets is compensated by an increase in foreign liabilities onto the English economy. It is
recorded as a credit (+) on the Short Term liabilities side.
11) ABC calls in half of the outstanding bonds it issued in Switzerland which are paid off at par by checks drawn on its
US bank.
These are purely financial transactions; the current account is not concerned.
ABC repays half ($30,000) of the LT bond it issued with Swiss investors. It is an outflow recorded with a negative
sign in the long term liabilities account (it nets off half of the initial debt).
The check drawn on the US bank is a ST liability on Swiss residents. It is recorded with a positive sign in the ST
liabilities account.
12) The Luxembourg government issues 100,000 dollars worth of long term bonds denominated in euros at an interest
rate of 5%. US residents purchase 50% of the issue. They pay by purchasing euros from non US banks.
These are purely financial transactions; the current account is not concerned.
$50,000US outflows recorded on the debit side as long term claims. It is an increase of foreign assets.
The non US bank receive dollars in exchange for the euros. These dollars are a short term claim on the US central bank.
It’s a liability for the US economy. Non US banks can ask to turn them into euros. It is recorded on the credit side as a
short term liabilities (+).
13) The Fed buys 200,000 dollars worth of gold in South Africa. 50% is paid from its foreign reserves of euros and the
rest is paid with dollars.
These are purely financial transactions. Only the capital account is concerned (the current account is not involved).
Gold is purchased by the Central Bank. It’s an increase in foreign assets (considering gold as foreign assets). It’s a use
of funds recorded as debit (-) in the change in reserves.
The $100,000 paid in dollars generates a short term liability and is recorded with a positive sign.
The $100,000 worth of euros is a decrease in foreign assets. It’s a source of funds for purchasing gold. It is recorded as
a credit (+) in change in reserves account
14) A US exporter sells 250,000 dollars worth of equipment billed in USD to a Colombian importer. The Colombian
importer obtains the dollars by borrowing them from a Colombian bank and transfers them to the exporter’s US bank.
It is recorded as a positive 250,000 in the export of goods account.
On the other side, the dollars initially held abroad by a Colombian bank were at that time a short term liability for the
US economy. By returning to the US, they cancel this initial liability. It is decrease in foreign liabilities and is recorded
as debit (-) in the Short Term Liabilities account. When dollars held abroad return to the USA they cancel an initial
short term liability for the USA
15) ABC's Belgian subsidiary makes a profit of 25,000 dollars worth of euros and declares a dividend of 15,000
dollars. However, Belgian exchange controls prohibit dividend payments abroad. Consequently, ABC purchases
10,000 dollars worth of Belgian bonds from a Belgian resident and purchases a 6 month term deposit with the rest.
The $25,000 of profit is recorded as credit (+) in the Investment income account.
On the other side of the balance of payment, the $10,000 left in the company is recorded as debit (-) in the Direct
investment account. It’s a use of fund, an increase in foreign asset.
The remaining $15,000 is paid out as dividend but immediately reinvested abroad. It’s also a use of funds, an increase
in foreign assets. $10,000 is recorded as debit in the Long Term Claim. $5,000 is recorded as debit in the Short Term
Claim with a negative sign.
16) A Japanese exporter sells 150,000 dollars worth of computers to an American importer. The computers are billed
in yen. The American importer pays with yen purchased from a US bank.
$150,000 is recorded as imports of goods with a negative sign as debit.
The Yen in the US bank initially corresponded to a US Short Term Claim on Japanese economy and were recorded at
that time with a minus sign (it was originally an increase in foreign assets). They now return to Japan and cancel the
initial claim by being recorded as credit in the Short Term Claim account (it’s a decrease in foreign assets).
17) The Luxembourg government pays the year's interest on the bonds it issued in question 12 by crediting the
Luxembourg bank.
In the current account part: 50% of the bond is held by US residents. As such, they record as credit a $2,500 investment
income.
In the capital account part: since US residents leave the money (at least for the moment) in the Luxembourg bank, it’s
an increase in foreign assets. It is recorded as a debit in the short term claim account. It is a use of fund for the US.
18) ABC sells half of its subsisiary to a Belgian resident for 90,000 dollars. The purchaser pays 60,000 dollars in cash
that it borrowed from a Belgian bank. The rest is paid with long term bonds issued by the Belgian government.
This transaction nets off half of ABC’s initial direct investment.
It is recorded as credit in the direct investment account for $90,000. It is a decrease in foreign assets, a source of funds.
For the capital account, it is partly recorded as a debit in the long term claim account for the $30,000 invested in the
Belgian Gvt bond. It’s an increase of foreign assets, a use of funds. The remaining $60,000 in cash is transferred back
from a Belgian bank to the US. Initially they corresponded to a short term liability onto Belgium. It’s a decrease in
short term liabilities. It is recorded for $60,000 as debit in the short term liability.
19) A US importer pays 25,000 dollars worth of sterling to an English transporter. The US importer obtains the sterling
by purchasing them from a bank in London.
The US importer pays a service: $25,000 to be recorded in the current account part as debit in the Service import
account.
The bank in London receives dollars from the US importer in exchange for sterling. Therefore, on the capital account
part, the US economy has a short term liability of $25,000 recorded with a positive sign. It’s an increase in foreign
liabilities.
20) The Fed sells gold to an Argentine bank for 2,000,000 dollars.
These are purely financial transactions. Only the capital account is concerned (the current account is not involved).
The $2,000,000 worth of gold sold to Argentina is a decrease in foreign assets (a decrease in foreign exchange
reserves). It’s a source of fund and is recorded as a credit in the change in reserves account.
The $2,000,000 repatriated from the Argentine bank were at the origin a short term liability for the US economy. When
transferred back to the USA, it’s a decrease in Short term liabilities and recorded as debit (-) in the Short Term Liability
account.
Use the following T-accounts to record the foregoing transactions and then compile the balance of payments.
Answer to Balance of Payments
T-Accounts
CURRENT ACCOUNTS
Exports fob
500,000 (3)
250,000 (14)
750,000
Imports fob
(1) 50,000
(16) 150,000
200,000
Service Exports
0
(2) 2,500
(4) 22,500
25,000
Investment Income
3,000 (9)
25,000 (15)
2,500 (17)
30,500
Service Imports
(5)
850
(19) 25,000
25,850
(7) 125
125
Unrequited Transfers
100
(6)
100
CAPITAL ACCOUNTS
(8) 120,000
(9) 1,500
(15) 10,000
131,500
(11) 30,000
30,000
Direct Investment
90,000 (18)
90,000
Long Term Liabilities
60,000 (8)
60,000
Long Term Claims
(12) 50,000
(15) 10,000
(18) 30,000
90,000
(3) 450,000
(3) 50,000
(4) 427,500
(6)
100
(9) 1,500
(15) 5,000
(17) 2,500
936,600
Short Term Claims
52,500 (2)
450,000 (4)
150,000 (16)
652,500
Short Term Liabilities
(2)
50,000
50,000 (1)
(14) 250,000
850 (5)
(18) 60,000
125 (7)
(20) 2,000,000
60,000 (8)
1,000,000 (10)
30,000 (11)
50,000 (12)
100,000 (13)
25,000 (19)
2,360,000
1,315,975
(10)
(13)
Change in Reserves
1,000,000
100,000
200,000
2,000,000
1,200,000
2,100,000
(13)
(20)