Homework # 6

International Finance

Miguel D. Ramirez

1. Classify the following transactions in the Chilean balance-of-payments:

a. A Chilean auto parts manufacturer sells Ps500,000 of parts to a U.S. firm, allowing 30 days trade credit until payment is due.

b. The U.S. gives Ps10,000 worth of food aid to the Chilean government to help feed earthquake victims in Santiago (capital of Chile).

c. A U.S. tourist travels to Valdivia, Chile, and spends Ps100 on hotels and pisco (a Chilean drink) while on vacation. He pays with a travelers check issued by a bank in Hartford, Ct.

d. Senor Hernandez in Santiago receives Ps80 in interest from a certificate of deposit in a Hartford, CT, bank. He deposits the Ps80 in a branch of Bank of America in Chile.

e. A consortium of American banks lends Ps100,000 to the Chilean government. The government spends one-half the loan in U.S. farm equipment. The rest is invested in 180-day CDs issued by New York banks.

2. What is the value of the current account in the preceding problem? The capital account? Does the BOP balance?

3. Using the balance-of-payment data from the EROP, show that the B.O.P. for 1997 does in fact balance. Subdivide your B.O.P. into the following subaccounts: trade balance, current account, capital account, reported capital account and official settlements account.