Which of the following transactions could contribute to a British current account surplus? Discuss.a. A French firm sells defense equipment to the British government for 250 million pounds in bank deposits.b. Great Britain makes a gift of $500 million to the Iraqi government in the form of equipment to aid in reconstruction.

What will be an ideal response?

POSSIBLE RESPONSE:

a. The transaction will lead to a debit entry in the current account, and this will not contribute to a British current account surplus (rather to a deficit).

b. The export of the British equipment to Iraq will be recorded as a credit item in the current account of Great Britain. A debit item is created to represent the gift recorded in the unilateral transfers part of the current account. The net effect on the British current account is zero.