Q. Bayerische Motoren Werke AG (the German manufacturer of BMW automobiles) opened a plant in South Carolina. Assume that this involved buying land and a factory building for a total of 25 million Deutsche marks (DM), and that the United States and Germany operated under a perfectly flexible exchange rate regime. The (hypothetical) exchange rate between U.S. dollars and DM was $1/DM2.

a) Show how the transaction would have been recorded in the U.S. balance-of-payments accounts. What was the net effect on the U.S. balance of payments with Germany?

b) Show how the transaction would have been recorded in the German balance of payments accounts. What was the net effect on the German balance of payments?