An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true:
Net Capital OutflowNet Capital Outflow = = Net ExportsNet Exports
In other words, if a transaction directly affects the left side of this equation, then it must also affect the right side. The following problem will help you understand why this identity must hold.
Suppose you are a software engineer living in the United States, and you just sold your latest product to a Russian consumer for RUB 7,000.
Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column.
Hint: The magnitude of change should always be positive, regardless of the direction of change.
Direction of Change Magnitude of Change
(Rubles)
Exports
Increase/no change/decrease
Imports
Increase/no change/decrease
Net Exports Increase/no change/decrease
Because of the identity equation that relates to net exports, the in U.S. net exports is matched by in U.S. net capital outflow. Which of the following is an example of how the United States might be affected in this scenario? Check all that apply.
You store the rubles in your safety deposit box at home.
You purchase RUB 7,000 worth of stock in a Russian corporation.
You buy RUB 7,000 worth of Russian bonds.
