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?