Question

Net capital outflow is equal to: A) national saving minus the trade balance. B) domestic investment plus the trade balance. C) domestic investment minus national saving. D) national saving minus domestic investment.

Answer 1

Answer:

The correct answer is D) national saving minus domestic investment

Explanation:

The net capital flow (FNC), also called net foreign investment, refers to the difference between the acquisition of foreign assets by local residents and the acquisition of domestic assets by non-residents. Net capital flows take two forms: foreign direct investment and portfolio investment. Foreign direct investment involves actively managing acquired assets while portfolio investment does not require an active role.

An open economy can therefore buy and sell assets in financial markets generating capital flows.