Answered: If you visited Cancun, Mexico and…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter11: Foreign Exchange, Trade, And Bubbles

Section: Chapter Questions

Problem 7MC

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If you visited Cancun, Mexico and purchased a meal in a local restaurant there, that would find its way into the American balance of payments as a:

A) Positive entry in the current account

B) Positive entry in the financial and capital account

C) Negative entry in the current account

D) Negative entry in the financial and capital account

Expert Solution

Step 1

The items in the current account are recorded into two parts:
1) Export and imports of visible items (physical items)
2) Export and import of invisible items such as transport, banking, tourism, shipping, insurance, gifts, and so on.

This implies money spent by tourists is recorded in the current account. Now, an outflow of money has a negative effect on the BOP because it increases current account balances whereas an inflow of money has a positive effect on the BOP because it decreases current account balances.

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