A Mexican travels to Brazil to buy a gemstone which costs...

Name: Problem 4, Chapter 13: International Economics: Theory and Policy
Uploaded: 2024-01-01T08:20:45-08:00
Duration: 2 min 11 s
Channel: Jennifer Stoner
Description: A Mexican travels to Brazil to buy a gemstone which costs 3,000 Real (Brazilian currency). The Brazilian company that sells the gemstone then deposits the 3000 Real in its account in a Panama bank. How would these transactions show up in the balance of payments accounts of Mexico and Brazil? What if the Mexican pays cash for the gemstone?

A Mexican travels to Brazil to buy a gemstone which costs 3,000 Real (Brazilian currency). The Brazilian company that sells the gemstone then deposits the 3000 Real in its account in a Panama bank. How would these transactions show up in the balance of payments accounts of Mexico and Brazil? What if the Mexican pays cash for the gemstone?

Key Concepts

Current Account Transactions

Current account transactions include the export and import of goods and services. In an international sale, the exporting country records a credit entry (an inflow of funds) for the sale of the good, while the importing country records a debit entry (an outflow of funds) for the purchase. This component focuses on the real transfer of goods and services, irrespective of how payment is ultimately settled through banking channels or cash.

Payment Methods in International Trade

The method of payment in international trade can influence the way transactions are recorded in the balance of payments. Whether payment is made through bank transfers, deposits in foreign banks, or as cash, the underlying transaction of goods exchange is recorded in the current account. However, the processing of the actual funds (especially when involving a deposit in a foreign bank) enters the financial account. The payment method may affect the timing and form of capital flows, but the fundamental trade of goods and corresponding adjustments in international investment positions remain consistent.

International Banking and Deposits

Cross-border deposits and banking arrangements play an important role in the financial account of the balance of payments. When funds are deposited in a bank located in a different country, this not only affects the financial account of the country where the funds originated but also of the host country where the bank accounts are maintained. This concept is crucial in understanding how subsequent repatriation or investment of these funds might be recorded in the balance of payments.

Balance of Payments Structure

The balance of payments (BOP) is a comprehensive record of a country’s economic transactions with the rest of the world over a specific period. It is divided mainly into the current account, which records trade in goods and services, income, and current transfers, and the financial account, which records cross-border investments, loans, and other financial flows. Understanding this structure is key to analyzing how international transactions, regardless of the payment method, impact a country’s external economic positions.

Financial Account Transactions

The financial account records changes in international ownership of financial assets and liabilities. When funds related to an international transaction are transferred to or deposited in foreign financial institutions, such as when the seller deposits money in a bank abroad, this transaction is recorded in the financial account. This reflects the movement of capital between countries and signifies a change in the financial claims between residents and non-residents.

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