a. Show how the following transactions are recorded in India's balance of payments using double-entry bookkeeping i.e. credit (+) and debit (-) for each transaction. Also show in which account (current or capital/financial) each credit and debit is counted.

Record all transactions in US dollars using these exchange rates:

1$ = ¥100; $2.00 = £1; $1 = 50 Rupees (Indian currency)

I. India receives foreign aid (a transfer) in the form of a $1 million grant for a development project. $1 million in the form of an American bank check.

ii. India imports agricultural machinery from Japan for 100 million Yen paid by check.

iii. The Indian government sells bonds worth Rupees 100 million (Rs.) to British investors; investors receive Rupees for an equivalent British pound (£) from an Indian commercial bank.

iv. Reserve Bank of India (central bank of India), iii. He buys the pounds obtained in the section from the commercial bank for an equivalent rupee value.

b. What are the net changes in India's current account, financial account and official reserve balance, measured in US dollars, after all these transactions are completed?

Answer rating: 100% (QA)

In the balance of payments any transaction resulting in a receipt of funds from foreigners is a credit and is recorded with a plus sign while any tran... View the full answer