Question

A New Yorker travels to New Jersey to buy a \(\$ 100\) telephone answering machine. The New Jersey company that sells the machine then deposits the \(\$ 100\) check in its account at a New York bank. How would these transactions show up in the balance of payments accounts of New York and New Jersey? What if the New Yorker pays cash for the machine?

Short answer

With a check, New York's bank liabilities decrease, New Jersey's company assets increase, and New York's bank claims on the New Jersey company's bank increase by \(100. With cash, New Jersey's cash holdings rise, and New York's fall by \)100.

Step-by-step solution

Understanding Balance of Payments

To solve this exercise, understand that the balance of payments records all economic transactions between residents and non-residents of a country. Here, the transactions are between a New York resident and a New Jersey company.

Recording the Check Payment

When the New Yorker writes a check for \(100 to the New Jersey company, the transaction affects the balance of payments. The New York bank's liabilities decrease by \)100, and the New Jersey company's assets increase by \(100. The New York bank's assets (a claim on the New Jersey company's bank) also increase by \)100.

Recording the Cash Payment

If the New Yorker pays in cash, there is no change in the bank liabilities or claims between the two states. However, the cash asset physically moves from New York to New Jersey, potentially resulting in an increase in New Jersey's cash holdings and a decrease in New York's.

Key concepts

Economic Transactions

Economic transactions encompass all forms of trade and financial exchanges between entities. These not only include the purchase and sale of goods and services but also transfers of money and financial assets. For instance, when a New Yorker buys a telephone answering machine for \( $100 \) in New Jersey, it represents a cross-border transaction within the same country. Such internal transactions demonstrate how money changes hands, signifying the shifts in the distribution of financial resources. It's crucial to monitor such activities, as they are fundamental components of regional economics, providing a snapshot of economic interactions.

When analyzing these types of transactions, accountants make detailed entries to ensure an accurate financial record—a process paramount in financial accounting. If the individual pays by check, the transaction affects the financial positions of both the buyer's and seller's bank accounts, shifting liabilities and assets correspondingly. A cash payment, on the other hand, doesn't alter bank records but does result in a tangible movement of currency from one entity to another—still an economic transaction, albeit less visibly recorded in institutional accounts.

International Trade

While our example focuses on a transaction within a single country, international trade operates on these same principles on a global scale. It involves the exchange of goods, services, or capital between countries. These exchanges, like internal ones, are meticulously detailed in balance of payments accounts, which are crucial for financial accounting on an international level. This becomes particularly important for maintaining macroeconomic stability, as countries must manage their imports, exports, and the flow of financial assets.

International trade ensures countries can supplement their domestic resources with foreign goods and services, thereby facilitating a global economy with countries specializing in the production of different commodities. This specialization and the subsequent trade can elevate a region's economic prosperity, linking international trade closely to regional economics.

Financial Accounting

Financial accounting is the field concerned with the summary, analysis, and reporting of financial transactions pertaining to a business. In the context of economic transactions, financial accounting involves recording such transactions in a systematic way. This ensures that an accurate representation of a company or entity's financial position can be assessed at any time.

The process includes journal entries, ledger accounts, and the preparation of financial statements, which reflect the health of a business. For example, when the New Jersey company sells the answering machine, this sale, the received check, and the subsequent deposit into its bank are all recorded entries that reflect income for the company and affect its balance sheet. This meticulous documentation is vital for assessing a region's economic health and is a building block for a larger scope of economic analysis.

Regional Economics

Regional economics is an area of economics that deals with economic issues at the regional level, considering the geographical distribution of economic activities. It looks at how and why economics activities are located in specific regions and how these activities affect regional economic health. The example offered provides a microcosm of regional economics at play — a New York resident acquiring an asset, the answering machine, from New Jersey.

The balance of payments within regional economics helps outline the economic standing of that region by capturing all economic transactions within it. It can offer insights into the flow of money, resources, and goods across borders — whether these borders are national or, as in the example, between states within a country. The interactions captured may inform policy-making, investment decisions, and can signify shifts in regional competitiveness and economic clout.