Question

Which of the following international accounts records the purchase and sale of financial assets and real estate between the United States and other nations? a. The balance of trade account b. The current account c. The capital account d. The balance of payments account

Short answer

The correct international account that records the purchase and sale of financial assets and real estate between the United States and other nations is d. The balance of payments account.

Step-by-step solution

Understand the concept of international accounts

International accounts are used to measure and record the economic transactions between a country and the rest of the world. There are different types of accounts that serve various purposes in recording these transactions. Understanding the purposes of these accounts will help us select the correct answer.

Understand the different types of international accounts

Before identifying the correct account for recording the purchase and sale of financial assets and real estate, let's define and understand each type of international account given in the options: a. The balance of trade account: It records the difference between a country's imports and exports of goods and services. It does not involve transactions of financial assets or real estate. b. The current account: It records the transactions related to goods, services, incomes, and current transfers between a country and the rest of the world. Like the balance of trade account, it also does not cover financial assets or real estate transactions. c. The capital account: This account records the transactions related to capital transfers (such as debt forgiveness or transfers of ownership) and the purchase and sale of non-produced, non-financial assets like land and natural resources between countries. d. The balance of payments account: It is a comprehensive account that covers all transactions between a country and the rest of the world. It includes the current account, the capital account, and the financial account, which records transactions of financial assets and liabilities, such as the purchase and sale of financial assets and real estate.

Identify the correct international account

Now that we understand the purpose of each account, we are able to identify the correct account type for recording the purchase and sale of financial assets and real estate between the United States and other nations. We can see that the balance of payments account (option d) is the most appropriate option since it includes transactions of financial assets and real estate. So the correct answer is: d. The balance of payments account

Key concepts

Balance of Payments

The balance of payments is like a country's financial diary. It keeps track of all financial exchanges with the rest of the world over a particular period of time. This includes everything from exporting goods to importing services.
The balance of payments is essential because it shows how money moves around the globe and whether a country is earning more than it spends.

• It includes all transactions in goods, services, investments, and transfers.
• This account is comprehensive and details a country's financial health in relation to the world.

The balance of payments is divided into three main parts: the current account, the capital account, and the financial account. This structure helps us view the full spectrum of a nation's fiscal interactions.

Capital Account

The capital account is a key piece of the balance of payments jigsaw puzzle. It records all transactions that involve capital transfers between countries. These aren’t your everyday purchases or services.
Capital accounts come into play during big shifts in asset ownership.

• This might involve the transfer of property rights or the forgiveness of debt between countries.
• It could also include the purchase and sale of non-produced, non-financial assets. For example, this might cover land or rights to natural resources.

While the capital account doesn't record routine financial assets, it focuses on significant one-time changes.

Financial Assets

Financial assets are the backbone of more complex financial transactions between nations. They include everything from stocks and bonds to real estate.
When countries buy or sell financial assets, these transactions can significantly influence their economic standing.

• Purchasing foreign stocks or bonds are examples of such transactions.
• These financial moves are crucial for shaping international market positions.

Tracking these exchanges helps provide a better picture of economic strategies and international investment trends.

Balance of Trade

The balance of trade is a simple yet powerful concept, focusing on the trade of goods and services. It sums up the difference between exports and imports.
This balance shows whether a country is exporting more goods than it imports or vice versa.

• A trade surplus happens when exports exceed imports.
• Conversely, a trade deficit occurs when imports are greater than exports.

It's a key indicator of economic health, highlighting how open a nation's markets are and how competitive its goods are on a global scale.

Current Account

The current account is an all-in-one account for day-to-day international transactions. It's like tracking your monthly income and expenses.
This account captures the flow of goods, services, income, and current transfers between countries.

• Goods exported or imported, like electronics or oil, are recorded here.
• Services such as tourism or banking also make an appearance.
• Income from investments and regular international transfers, like remittances, round out the picture.

While it doesn’t cover the sale of financial assets or real estate, it's vital for understanding a nation's regular trading performance.