Suppose that during one year the following events happen. A French investor buys stock in General Electric, a U.S.-based corporation. General Electric pays the investor dividends until she sells the stock to a U.S. resident, who quickly resells the stock to another U.S. resident. Explain how these transactions would be recorded in the U.S. balance of payments?

Question

What will be an ideal response?

Answer 1

The original sale of the stock from General Electric to a French investor would be recorded as a capital inflow (credit) in the financial account under foreign-owned assets in the United States. The dividends earned by the French investor would be recorded as debits in the current account under net investment income. When the French investor sells the stock to a U.S. resident, this transaction would be recorded as a debit in the financial account because it would reduce the amount of foreign-owned assets in the United States. The subsequent sale of the stock from one U.S. resident to another U.S. resident would not be recorded in the U.S. balance of payments because no funds entered or left the United States.