Question

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: A) -$25 billion. B) -$10 billion. C) $10 billion. D) $25 billion.

Answer 1

B) -$10 billion.

Step-by-step explanation:

The net capital outflow (NFO) is the difference between exports and imports

It is the net effect of the imports and exports.

20 - 30 = -10 billions There is a trade deficit

Foreigners purchased more goods than resident of the economy purchased foreing goods.

The NFO is negative.

With the national saving and the NFO we can calcualte the investment:

S = I + NFO

25 = I - 10

I = 25 + 10 = 35