Question

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: 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 a fashion designer Living In the United States, and a trendy boutique in Bangkok just purchased your entire inventory for THB 80,000.
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 'No change,'' enter ''0'' in the Magnitude of Change column. Hint: The magnitude of change should always be positive, regardless of the direction of change. Because of the identity equation that relates)_________ to net exports, the in U.S. net exports Is matched by _________in U.S. net capital outflow. Which of the following Is an example of how the United States might be affected in this scenario?
a. You store the Thai baht in your safety deposit box at home.
b. You purchase THB 48,000 worth of stock in a Thai corporation and THB 32,000 worth of Thai bonds.
c. You exchange the THB 80,000 for dollars at your local bank, which then uses the foreign currency to purchase stock in a Thai corporation.

Answer 1

Answer:

1. a. Exports will increase by THB 80,000

You live in the US and you just sold something to someone outide the US. This is an export so you increased US exports by THB 80,000.

b. Imports will be $0.

You did not import anything from outside the country.

c. Net Exports will be THB 80,000

Net Exports are Exports less imports for a given period.

= 80,000 - 0

= THB 80,000

2. Because of the identity equation that relates to net exports, increase in U.S. net exports Is matched by an increase in U.S. net capital outflow.

As a result of the US exporting goods, money from other countries come into it. This flow of capital into the US contributes to the U.S. net capital outflow.

3. a. You store the Thai baht in your safety deposit box at home.

b. You purchase THB 48,000 worth of stock in a Thai corporation and THB 32,000 worth of Thai bonds.

c. You exchange the THB 80,000 for dollars at your local bank, which then uses the foreign currency to purchase stock in a Thai corporation.

In the first scenario, the US would be affected because even though money came in, it is not being used but it rather sitting ideal at home.

In the other 2 scenarios, the money was not used to purchase thing in the US but rather went back outside the country. This means that capital flowed out of the US so negatively affects her Net Capital Outflow.