Question

MPQ: NX = NCO Identity

1. The balance of payments identity states that:

a. savings equal investments plus net capital outflow

b. Investments equal savings

c. Net exports equal net capital flow

d. Savings equals investment plus net capital outflow

2. Countries that have a trade deficit have a (Click to select) net capital outflow.

a. positive

b.constant

c. negative

3.  If Country X purchases goods from Country Y valued at $400 and sells $500 worth of its own goods to Country Y, then the net capital outflow of Country X is

a. positive

b.constant

c. negative

4.. Lilyland and Broding are exclusive trading partners. If interest rates suddenly increase in Broding but stay constant in Lilyland, net capital outflows in Lilyland will likely

a. Increase

b. decrease

c. it will stay constant

Please provide answers with an explanation, I would like to double-check my answers and confirm my understanding, I will Upvote on correct responses! THANK YOU

Answer 1

1) The correct option is c. BOP accounts all the transaction takes place between domestic country and home country in a financial year. It has mainly two components:Current account and capital account. The balance of payment must always equal to zero. This means net exports from current account must equal net capital flows from capital account.

2) The correct answer is a. Trade deficit means imports exceed exports. Thus deficit in the current account must be balanced by surplus in capital account to fulfill the condition of BOP. Net capital outflow which is defined as inflows less outflows is positive.

3) The correct answer is a.

Net capital outflows(NCO) = (capital inflows - capital outflows)

Thus NCO = 500-400= 100.

4) The correct answer is b.

Increase in the interest rate in broding result in huge capital inflows because investors across the world take advantage of high rate of return. Where as in Lilyland there is huge capital outflow. Thus overall net capital outflow decreases.