Question

Suppose a country exports $500 worth of goods and imports $100 worth of goods. a. What is the current account balance for the country? b. What can be said about the financial account balance - is there a net financial inflow or net financial outflow?

Answer 1

The current account balance for the country would be a surplus of $400, and there would be a net financial outflow, indicating the country is a net lender internationally.

Step-by-step explanation:

The subject of this question falls under Business, specifically international trade and finance. The grade level is College, as it deals with concepts typically covered in an introductory macroeconomics course.

a. To calculate the current account balance, we look at the trade balance, which is the difference between exports and imports. In this scenario, the country exports $500 worth of goods and imports $100 worth of goods. The trade balance can be calculated as:

1. Exports ($500) minus Imports ($100) equals Trade Balance.
2. $500 - $100 = $400.
3. Therefore, the country has a trade surplus of $400.

The current account balance would include this trade surplus.

b. Regarding the financial account balance, since the economy has a trade surplus, it suggests there is a net financial outflow. This is because the country is sending less money abroad to pay for imports than it is receiving from exports. The excess money from the trade surplus typically corresponds to an increase in foreign investment or lending made by the country, representing a net financial outflow.

In terms of the national savings and investment identity implied by this situation, the economy would see an increase in national savings due to the trade surplus, which would increase the potential for capital investment both domestically and internationally. Therefore, the country could be characterized as a net lender internationally.