Final answer:
A net cash outflow from financing activities indicates that a company is spending more money in these activities than it is receiving. The national saving and investment identity shows that a trade surplus results in a net outflow of financial capital, which can be used for investment abroad. The relationship between trade balances and the demand and supply of financial capital is encapsulated in this identity.
Step-by-step explanation:
A net cash outflow from financing activities indicates that a company has disbursed more funds through these activities than it has brought in. This could occur through paying dividends, repaying debt or buying back stock. Conversely, a trade surplus is associated with an economy experiencing a net outflow of financial capital because the value of exports exceeds the value of imports. This situation impacts the national saving and investment identity, suggesting that the domestic financial capital being in surplus can then be invested abroad.
The national saving and investment identity can be framed as follows: domestic saving (S) plus the inflow of foreign saving, which is the trade deficit (imports (M) minus exports (X)), equals private investment (I) plus government borrowing (G-T). In this equation, if a government is borrowing (running a budget deficit), then it is a demander of financial capital and is presented on the left-hand side of the equation as G-T > 0. Additionally, when an economy records a trade surplus, it implies an outflow of financial capital that can be available for international investment.