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 U.S. exporter sells software to Israel. She uses the Israeli shekels received to buy stock in an Israeli company.

The U.S. export creates a trade (Click to select)deficitsurplus and the purchase of Israeli stock creates a capital (Click to select)outflowinflow.

NX (Click to select)>=< 0.

KI (Click to select)<>= 0.

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


b. A Mexican firm uses proceeds from its sale of oil to the United States to buy U.S. government debt.

The purchase of Mexican oil creates a trade (Click to select)deficitsurplus and the Mexican purchase of U.S. bonds creates a capital (Click to select)inflowoutflow.

NX (Click to select)><= 0.

KI (Click to select)>=< 0.

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


c. A Mexican firm uses proceeds from its sale of oil to the United States to buy oil drilling equipment from a U.S. firm.

The purchase of oil from Mexico and the Mexican purchase of drilling equipment (Click to select)does createdoes not create a trade (Click to select)deficit or surplussurplusdeficit and (Click to select)does not createdoes create a capital (Click to select)inflowinflow or outflowoutflow.

NX (Click to select)<>= 0.

KI (Click to select)=>< 0.

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

Answer 1

NX= Net export= Export-Import

KI=Net Capital inflow= Capital inflow- capital outflow

A. The U.S. export creates a trade surplus and the purchase of Israeli stock creates a capital outflow.

Reason- US export increases , So Net export increases, it is trade surplus. NX>0

Since Israeli stocks are brought it is capital outflow. KI<0

Both the values are equal and opposite.

NX + KI= 0.

B. The purchase of Mexican oil creates a trade deficit and the Mexican purchase of U.S. bonds creates a capital inflow.

Since US imports oil, net export is negative. NX<0.

Mexican firm invests in US so capital inflows. KI >0.

Both the values are equal and opposite.

So, NX + KI =0.

C.

The purchase of oil from Mexico and the Mexican purchase of drilling equipment does not create a trade deficit or surplus and does not create a capital inflow or outflow.

The purchase of oil is import and the sale of equipment is export. both values offset each other. So, NX = 0.

There is no capital inflow or outflow. So KI = 0.

NX + KI = 0.

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