Question

6.Define the terms “net exports” and “net capital outflow”. How are the two variables related in an open economy with clearing markets?

Answer 1

Net Exports is the monetary value of total exports less total imports of a country. It is also known as BALANCE OF TRADE.

Net Exports= Exports - Imports

Net Capital Outflow is defined as the net outflow of funds of a country through capital assets.

Net outflow= Capital invested in foreign markets - capital invested in domestic markets

or,

Outflow of investment - Inflow of investment

In an open economy,

Net Capital outflow and Net Exports are related.

Each transaction that affects the net capital outflow, also affects net exports in the same amount

Suppose, there is trade surplus an economy (Exports>Imports) then excess foreign money or currency is invested in foreign assets.

Also if there is trade deficit, then it must be financed by the investment made abroad.

** If net exports are positive then net Capital outflow be positive.