5. Consider the following transactions: Chinese manufacturer sells S240, 000 wor

Question

5. Consider the following transactions: Chinese manufacturer sells S240, 000 worth of consumer durables goods to Wal-mart. U.S. firm sells $50,000 worth of soy beans to Chinese firm. Chinese firm resells $40,000 worth of soy beans to Chinese consumers and leave rest in the inventory. . Chinese investor buys $80,000 worth of bonds issued by US firms The Bank of China (China's central bank) buys $50,000 worth of U.S. Treasury Bills Page 3 US firm provides S60,000 worth of financial services to Chinese firm. Accounting for all of the above transactions, what is the value of the U.S. Current Account and U.S. Capital Account? A. Current Account--8110,000 ; Capital Account- $80,000 B. Current Account--$130,000 ; Capital Account = $80,000 C. Current Account --130,000; Capital Account - $130,000 D. Current Account --110,000; Capital Account - $130,000

Explanation / Answer

Component of Current account are:

1. Export and Import of Goods (Merchandise Transactions or Visible Trade)

2.Export and Import of Services (Invisible Trade)

3.Unilateral or Unrequited Transfers to and from abroad (One sided Transactions)

4.Income receipts and payments to and from abroad:

Components of Capital account are:

1.Borrowings and landings to and from abroad.

2. Investments to and from abroad.

3.Change in Foreign Exchange Reserves.

Answer: (C)

Current account Capital account -$240000 +$80000 +$50000 +$50000 +$60000 total =-$130000 total = +$130000

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