ANSWERS
ECN 306 Assignment 1: Balance of Payments & Exchange Rates

Instructions: Please try to answer each question as fully as possible. Save a copy of your work. The assignment is due on or before the end of class on February 11.

1.) Show how the following transactions would be recorded as debits or credits on the US balance of payments accounts. Identify the amount, whether it is a credit or a debit and on which account it would be recorded (be as specific as possible in identifying account – i.e., be more precise than a simple current account/capital account distinction).
A.) A US tourist spends $100 in Mexico renting a fishing boat and the Mexican owner buys $100 of spare parts for the boat from a US company.
$100 credit on the merchandise exports section of the current account , $100 debit on the tourism section of the current account
B.) A German investor sells her holdings of General Motors stock and deposits the $5000 she receives for the stock in her US bank account.
$5000 credit on the “foreigners deposits in US banks” or short term part of the capital account, $5000 debit on the long term part of the capital account.

C.) General Electric receives a dividend of $5 million from its Brazilian subsidiary and uses the money to purchase an electronics distribution firm in Australia.
$5 million credit on the income part of the goods and services part of the current account $5 million debit on the long term capital account

2.) Wheat costs $$5.00/bushel in the US and the exchange rate is $1 = 10 pesos, the price of US wheat to Mexican buyers is $500 pesos. If the exchange rate changes to $1 = 8 pesos, the price of US wheat in Mexico will be 400 pesos. Mexicans will buy more, wheat from the US. The peso has gained value against the US $.

3.) The spot rate is $1 = 1 Euro, the interest rate in the US 10% per year and 1% per year in