Suppose that a Canadian farmer buys a Japanese tractor with cash. For Canada, this counts as a

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BlackTom AI · Accepted Answer

Here is how to analyze the scenario step by step. 
Option 1: 'financial account debit, current account debit.' A single transaction in the balance of payments cannot debit both the financial account and the current account for the same event, so this option misrepresents how the entries are recorded for an import financed by cash. It would create an impossible double-debit situation. 
Option 2: 'current account debit, financial account credit.' When a Canadian resident buys a Japanese-made tractor with cash, the purchase increases imports of goods from abroad, which is recorded as a debit in the current account (an outflow of funds for goods). The payment to the foreign seller reduces Canada’s claims on foreign financial assets (or increases Canada’s payments to foreigners), which is recorded as a financial account credit (a corresponding outflow). This pairing aligns with the standard BoP treatment for a visible import financed by cash. 
Option 3: 'financial account debit, financial account credit.' A single transaction cannot simultaneously debit and credit the financial account; that would cancel out or misallocate the flows, and it ignores the current account impact of importing goods. This option ignores the essential current account movement caused by the physical import. 
Option 4: 'capital account debit, capital account credit.' The capital account is not the relevant component for a standard import of goods financed by cash; the capital account typically covers transfers of capital assets, not routine merchandise trade. Thus this choice mistakenly directs the event to the wrong subcomponent of the BoP. 
In summary, the flow of funds from Canada to Japan due to importing and paying cash is best described as a current account debit for the import of a good, paired with a financial account credit reflecting the corresponding financial flow. The other options either duplicate debits, misapply the accounts, or reference an irrelevant BoP subcomponent.

01:220:300:01 INTERNATIONAL ECON Balance of payments and external wealth practice questions (not for credit)

Suppose that a Canadian farmer buys a Japanese tractor with cash. For Canada, this counts as a

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