Export Transactions. Suppose a Japanese exporter (Toyota) agrees to sell 300 billion yen

worth of cars to an American firm. Assume that the rate of exchange — that is, the rate or price at

which yen can be exchanged for, or converted into, dollars, and vice versa — is 100 yen for $ 1. This

means that the American importer must pay $3 billion to the Japanese exporter. Let us summarize

What occurs in terms of simple bank balance sheets (Table 8.1).

Table 8.1. Financing a Japanese export transaction

New York Bank Tokyo Bank

Assets Liabilities and net worth Assets Liabilities and net worth

Demand deposit of

American importer

—300 billion yen (a)

Deposit of Tokyo bank

+300 billion yen (c)

Deposit in New York

Bank

+300 billion yen (c)

($3 billion)

Demand deposit of

Japanese exporter

+$3 billion (b)

A) To pay for Japanese cars, the American buyer draws a check on its demand deposit in a New

York bank for $3 billion. This fact is denoted by the $3 billion demand deposit entry in the righthand

Side of the balance sheet of a New York bank.

b) The American firm then sends this $3 billion check to the Japanese exporter. But the rub is

That the Japanese exporting firm must pay its employees and materials suppliers, as well as its taxes,

in yen not dollars. So the exporter sells the $3 billion check or draft on a New York bank to some