Question

If a U.S. citizen in New York purchases a $1,200 television that was made in Korea, the Korean receives the money from the purchase. In that case, the U.S. current account _______________ and the U.S. capital account _______________.

Answer 1

1. decreases by $1,200
2. increases by $1,200.

Step-by-step explanation:

This is not exactly how selling imported goods work since most of the money stays in the country. For example, for every dollar spent on shoes made in China (or some other Asian nation), only about 25 cents return to China, while most of the money is earned by domestic companies (e.g. retailer, shipping company, etc.).

Lets assume that the citizen of New York spent $5,000 in a new TV and $1,200 went to Korea. The US current account will decrease by $1,200 (the current account measures exports minus imports) since the country has to pay for foreign imports.

The capital account measures financial transactions, and since the $1,200 is held by a Korean firm, then the US capital account will increase by $1,200.