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 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 "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 (Baht) Direction of Change Exports Imports Net Exports in U.S. net capital Because of the identity equation that relates to net exports, the in U.S. net exports is matched by outflow. Which of the following is an example of how the United States might be affected in this scenario? Check all that apply. 0 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. D You purchase THB 48,000 worth of stock in a Thai corporation and THB 32,000 worth of Thai bonds. You store the Thai baht in your safety deposit box at home Grade It Now Save & Continue Continue without saving

Answer 1

Net Capital Outflow = Net Exports

Now, as a fashion designer, a boutique in Bangkok ordered my products for THB 80,000.

Exports increase in this transaction, by 80,000 baht (direction is from US to Bangkok)
Imports are not affected by this transaction - magnitude of change is 0.
Net exports = exports - imports
Thus, net exports increase by 80,000 baht (direction is from US to Bangkok)

Because of the identity equation that relates to net exports, the increase in US net exports is matched by an increase in US net capital outflow.

The first two scenarios explain how the net capital outflow increases (in both cases, external stocks/bonds are being purchased).

Hope this helped!

Answer 2

ALL Three scenarios should be checked for the last part. The magnitude of change is 80,000 Baht in the imports and net exports. The imports is equal to 0