A country has net capital outflow of $40 billion. Which of the following is consistent with this net capital outflow?

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BlackTom AI · Accepted Answer

We start by recalling the relationship in the open economy: net capital outflow (NCO) equals net lending to the rest of the world, and it is also equal to net exports (NX). In other words, NCO = NX. Here, NCO is given as 40 billion dollars, so any statement that is consistent with NCO = 40 should reflect a net outflow of funds to foreign assets or a positive NX of 40.

Option 1: It has -$40 billion of net exports. This would imply NX = -40, which by the identity NX = NCO would mean NCO = -40, not +40. Therefore, this option is inconsistent with the given NCO of +40.

Option 2: Purchases of foreign assets by domestic residents exceed purchases of domestic assets by foreign residents by $40 billion. This directly describes a positive net capital outflow of 40, i.e., NCO = +40. Since NX = NCO, this is also consistent with NX = +40. This option aligns with the fundamental relationship between NCO and NX.

Option 3: Its saving is $35 billion and its domestic investment is $5 billion. In the standard identity for closed versus open economies, NCO equals saving minus domestic investment (NCO = S – I). Here S – I = 35 – 5 = 30. Thus this option implies NCO = 30, not 40. Therefore it is not consistent with the given NCO.

Option 4: All of the above are consistent with a net capital outflow of $40 billion. Since we have seen that options 1 and 3 are not consistent with NCO = 40, this collective statement cannot be true. The claim that all the above are consistent is therefore incorrect.

In summary, option 2 uniquely matches the definition and the open-economy identities for NCO and NX, while options 1 and 3 fail to align with NCO = 40, and option 4 falsely asserts that all are correct.

2254 ECON 0103 SEC2020 ECON 103 Homework 5

A country has net capital outflow of $40 billion. Which of the following is consistent with this net capital outflow?

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