Chapter 6: Problem 11

Many residents of the United States send money to relatives living in other countries. For instance, a Salvadoran farmworker who is temporarily working in San Diego, California, sends money back to his family in El Salvador. How are such transactions recorded in the balance of payments? Are they debits or credits?

Short Answer

Expert verified

Answer: International transactions like sending money to relatives in other countries are recorded in the balance of payments under the net current transfers category of the current account. These transactions are considered debits as they require an outflow of resources (money) from the country.

Step by step solution

Understanding Balance of Payments

The balance of payments is a record of all economic transactions between the residents of a country and the rest of the world during a given period (usually a year). It includes transactions related to the exchange of goods, services, investment, and financial transfers. The balance of payments is divided into three main accounts: the current account, the capital account, and the financial account.

Current Account

The current account is the sum of the balance of trade (exports minus imports of goods and services), net income from abroad (such as wages, salaries, and investment income), and net current transfers (including gifts and foreign aid). The transaction in question (sending money to relatives in another country) falls under the category of net current transfers.

Debits and Credits

In the balance of payments, transactions are recorded as either debits or credits. Debits represent transactions that require an outflow of resources from the country, while credits represent transactions that result in an inflow of resources into the country. For example, exporting goods and services are considered credits, while importing goods and services are considered debits.

Analyzing the Transaction

In this specific case, the Salvadoran farmworker is sending money back to his family in El Salvador. This transaction requires an outflow of resources (money) from the United States to El Salvador. Therefore, it is classified as a debit in the United States' balance of payments. It is also recorded as a debit in the net current transfers category within the current account.

Final Answer

To summarize, when a resident of the United States sends money to relatives living in another country, the transaction is recorded as a debit in the balance of payments under the net current transfers category of the current account.

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