Question

Krugman et al. (2015), Question 4: A Canadian travels to New Jersey to buy a $100 telephone answering machine. the New Jersey company that sells the machine deposits the $100 check in its account in a Canadian bank. How would these transactions show up in the balance of payments accounts of Canada and US? What if Canadian pays cash for the machine?

Answer 1

The purchase of the answering machine is a current account debit for Canada, and a current account credit for New Jersey (i.e., it is the imports for the former and the exports for the latter). When the New Jersey company deposits the money in its New York bank, there is a financial account credit for Canada and a corresponding debit for New Jersey (i.e., it is the exports of financial assets for the former and the imports for the latter).

If the transaction is in cash then the corresponding debit for New Jersey and credit for Canada also show up in their financial accounts. New Jersey acquires dollar bills (an import of (financial) assets from New York, and therefore a debit item in its financial account); Canada loses the dollars (an export of dollar bills (=financial assets), and thus a financial account credit).