Question

How do each of the following transactions affect:

     (1) the trade surplus or deficit for the United States AND
     (2) capital inflows or outflows for the United States

a. A Chinese exporter sells television sets to U.S. consumers, and uses the U.S. dollars earned to buy government debt.

The purchase of imported TVs creates a trade  (Click to select)  surplus  deficit  and the Chinese purchase of U.S. bonds creates a capital  (Click to select)  outflow  inflow  .

     NX (trade balance)  (Click to select)  >  =  <    0.

     KI (net capital inflows)(Click to select)  >  <  =    0.

     NX +KI  (Click to select)  <  =  >    0.


b. An American oil producers uses proceeds from its sale of oil to Canada to buy oil drilling equipment from a Canadian firm.

The sale of oil to Canada and the purchase of drilling equipment by the U.S. firm   (Click to select)  does not create  does create   a trade  (Click to select)  deficit or surplus  surplus  deficit  and  (Click to select)  does not create  does create  a capital  (Click to select)  outflow  inflow or outflow  inflow  .

     NX (trade balance)  (Click to select)  =  >  <    0.

     KI (net capital inflows)  (Click to select)  >  <  =    0.

     NX +KI  (Click to select)  >  =  <    0.

c. A. U.S. firm in the agriculture industry sells corn to Brazil and uses the proceeds from its sale to purchase newly issued bonds from the Brazilian government.

The U.S. export creates a trade  (Click to select)  surplus  deficit  and the purchase of Brazilian government bonds creates a capital  (Click to select)  inflow  outflow  .

     NX (trade balance)(Click to select)  >  <  =    0.

     KI (net capital inflows)  (Click to select)  =  >  <    0.

     NX +KI  (Click to select)  >  =  <    0.

Answer 1

Solution:-

Given that

a.

US people import of TV sets creates a trade deficit and US dollars earned from exporting to US are used to buy the governement debt would increase capital inflow in US and create capital surplus.

NX decreases

KI increases

NX + KI remains unchanged.

b.

The sale of oil to Canada would increase the trade surplus and purchase of capital equipment from canada would increase capital inflow.

NX increases

KI decreases

NX + KI remains unchnaged

c.

The US exports of corn creates a trade surplus and purchase of brazilian bonds creates a capital outflow.

NX increases

KI decreases

NX + KI remains unchanged