Question

A U.S. firm buys apples from New Zealand with New Zealand dollars it got in exchange for U.S. dollars. New Zealand residents then use these dollars to purchase oranges from the U.S. Which of the following increases? a. New Zealand’s net capital outflow and New Zealand’s net exports b. only New Zealand’s net exports c. only New Zealand’s net capital outflow d. neither New Zealand’s net exports nor New Zealand’s capital outflow

Answer 1

The correct option is (D) Neither New Zealand's net exports nor New Zealand's capital outflow. This is because both countries have purchased from each other. If only US had purchased from New Zealand, then net exports of New Zealand has risen. But in this case, each country has sold the goods to its trading partner, so the net exports remains constant for both countries.

Also, there is not capital inflow or outflow as the capital is not invested in the country it is just used to buy the goods from one country.

So, neither net exports rises nor the capital outflow for NEw Zealand.