4. Net capital outflow and net exports An open economy interacts with the rest o

Question

4. Net capital outflow and net exports An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true: Net Capital Outflow = Net Exports In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold Suppose you are the purchasing manager for a large chain of restaurants in the United States, and you need to make your semiannual purchase of tea. You pay $1,500,000 for a shipment of tea from an Indian tea producer Determine the effects of this transaction on exports, imports, and net exports in the u.S. economy, and enter your results in the following table. If the direction of change is 7change, "enter "O-in the Magnitude of Change column. Hint: The magnitude of change should always be positive, regardless of the direction of change. Magnitude of Change (Dollars) Direction of Change Exports Imports Search the web and Windows

Explanation / Answer

Imports from India worth $1500000.

Exports worth zero.

Net exports = Total exports- total imports = -$1500000

Here net exports = net capital outflow

A) In situation one it becomes equal as currently it has deficit balance with India as it has purchased from India if it sell bonds worth the same amount it will become equal.

B) In situation two if Indian tea purchases the production of U.S it would again become equal as it was in debt of amount $1500000 and now if India agrees to purchase goods worthsame amount they become equal.

C) If India uses the same amount it gets to make investments then in this case will be affected the most as India is not using the same amount to make transactions with U.s in similar grounds.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.