Ⅲ How to enter transactions into the BOP?

A. The Current Account Entries

Debit (-) → cause outflow of money

Credit (+) → bring in money

1. Trade in goods:

Import (-) : (-) U.S. farmer purchases Germantractor.

Export (+): (+) India stores buy Apple iPods

2. Trade in services:

Import (-): (-) An American takes a cruise ona Norwegian cruise line.

Export (+): (+) A Brazilian company hiresU.S. consulting firm.

3. Investment income receipts and payments

Interest, dividend, and other income paid (-):

(-) The U.S. subsidiary of a Japanese companypays dividends to its parent company in Japan

Interest, dividend, and other income receipts(+):

(+) A Canadian company pays salaries to itsexecutives stationed in New York.

4. Unilateral Transfers

Remittances by foreigners in the U.S.,pension paid and aid offered by the U.S. to its citizens living abroad (-)

Remittances by Americans working abroad,pension paid and aid offered by foreigners to the U.S. (+)

B. The Capital Account Entrie

1. Direct investment (factories, machines)

Purchases of U.S. physical capital byforeigners (+) :

(+) Ford Motor Company sells its factory toBritish investors.

Purchases of foreign physical capital by U.S.residents (-):

(-) Ford Motor Company builds a factory inMexico.

2. Portfolio Investment (stocks, bonds, CDs)

Purchases of U.S. securities by foreigners(+):

(+) A London-based insurance company buysU.S. corporate bonds.

Purchases of foreign securities by U.S.residents (-):

(-) An American buys shares of a Europeancompany stock in London  Stock Exchange.

3. Other investments – loans and currency

Increase in loans and trade credits to U.S.residents by foreigners (+):

(+) A Canadian firm receives a payment forexports from the U.S. firm.

Increases in loans and trade credits toforeigners by U.S. residents (-):

(-) A U.S. firm deposits $1 million in a bankaccount in London.

4. Official Reserve Assets

Increases in dollar reserves held by foreigncentral banks (+)

Increases in holdings of foreign currencyreserves by the Fed (-)

5. Examples of BOP Entries

(1) French retailer buys $50,000 wheat fromfarmer Joe in Idaho, and pays with a 90-day note.

$50,000 exports (+ in merchandise trade)

$50,000 90-day note (- in private capitalaccount because it is a loan that Joe lends to the French retailer)

(2) U.S. resident receives $10,000 ininterest from a German bond and is deposited in German bank account.

$10,000 investment income (+ in investmentincome for the current account)

$10,000 bank deposits in Germany (- inprivate capital account because it is a portfolio investment) 

(3)  U.S. government donates $100,000 in wheat toNicaragua.

$100,000 wheat shipped (+ as exports inmerchandise trade)

$100,000 donation (- in the unilateraltransfer because it is aid offered to foreigner by the U.S.) 

(4) U.S. tourist travels to Germany, spend$5,000 on an “Oktober Fest” package deal, and pays a German travel company.

$5,000 Germany trip by American tourist (- asimport of services)

$5,000 payments for the trip to Germancompany (+ in private capital account because it is a payment of trade creditto foreigners by U.S. resident)