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Posted 6 months ago
Mr. Frank is a citizen of Gatorland. He wants a better return on his savings than he gets in Gatorland, so he buys newly issued government bonds from the nation of Hamsterville.
How is this purchase counted in the balance of payments in each country?
Choose 1 answer:
(A) No impact on Gatorland's balance of payments; a credit in Hamsterville's current account.
(B) A debit in Gatorland's current account; a credit in Hamsterville's current account.
(c) A debit in Gatorland's financial account; a credit in Hamsterville's financial account.
(D) A credit in Gatorland 's financial account; a debit in Hamsterville's financial account.
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Answer from Sia
Posted 6 months ago
Solution by Steps
step 1
Identify the nature of the transaction: Mr. Frank's purchase of government bonds is a financial transaction, not a trade in goods or services
step 2
Determine the impact on Gatorland's balance of payments: The purchase of foreign bonds by a resident is a financial outflow, so it is recorded as a debit in Gatorland's financial account
step 3
Determine the impact on Hamsterville's balance of payments: The issuance of bonds to a foreign resident is a financial inflow, so it is recorded as a credit in Hamsterville's financial account
Answer
C
Key Concept
Balance of Payments Financial Account
Explanation
Transactions involving financial assets, like the purchase of government bonds, are recorded in the financial account of the balance of payments. A purchase by a resident of one country of financial assets from another country is a debit for the buyer's country and a credit for the seller's country.
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