Question

(a) define net exports and net foreign investment

(b) explain how and why net exports and net foreign investment are related

(c) Suppose that real interest rates decrease in the rest of the world,but not in Hong Kong. Explain how this would be likely to affect net foreign investment in Hong Kong?

Answer 1

Net export can be defined as an imbalance which exits between the exports of a country and its imports.

Net Export = Total Exports - Total Imports

Net foreign investment is mainly used to estimate the difference between the amount of foreign assets which are purchased by the domestic residents and the amount of domestic assets which are bought by foreign residents

Net foreign investment = foreign assets purchased by the domestic residents - domestic assets bought by foreign residents

The relationship between Net exports and Net foreign investment is as below

Net Exports = Net foreign investment

If any transaction affects any change in either side of the above equation, this will also cause similar change in other side.

If real interest rates decrease in the rest of the world, but not in Hong Kong. This will result in greater investment in Hong King. This is due to the fact that higher interest rates increase the value of a given country's currency