Question

Given the transactions involving Paolo's purchase of mezcal and a U.S. company selling spark plugs, what are the financial implications and outcomes for each party in these transactions?

Answer 1

Foreign investments in U.S. stocks and bonds increase the current account balance, while an increase in the trade deficit leads to a larger current account deficit. Certain financial flows occur from Germany to the U.S. economy, and from the Brazilian economy to the U.S. economy.

Step-by-step explanation:

1. If foreign investors buy more U.S. stocks and bonds, it would increase the capital inflows and show up as a surplus in the current account balance. This means that the U.S. is receiving more financial investments from foreign investors, which contributes positively to the overall balance of payments.

2. If the trade deficit of the United States increases, it would lead to a larger current account deficit. A trade deficit means that the U.S. is importing more goods and services than it is exporting. This imbalance creates an outflow of funds from the country, which results in a negative impact on the current account balance.

3. Here are the financial flow classifications for the events:

1. An export sale to Germany involves a financial flow from Germany to the U.S. economy.
2. The return paid on U.S. investments in Brazil involves a financial flow from the Brazilian economy to the U.S. economy.