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 a statistician living in the United States, and you just sold your newest sales forecasting model to a company in Argentina for ARS 800,000.
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.
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 buy ARS 800,000 worth of Argentine bonds.
b. You purchase ARS 800,000 worth of stock in a Argentine corporation.
c. You exchange the ARS 800,000 for dollars at your local bank, which then uses the foreign currency to purchase Argentine bonds.
Answers: 3
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