Question

Check out this data on an open economy

Private savings: 1,000 Budget deficit:200 Investment:700

then decide which is TRUE

Select one:

a. The country as a net capital outflow of 300

b. The country has a net capital outflow of 100

c. The country has a trade surplus of 300

d. The country has a net capital inflow of 500

e. The country has a net capital inflow of 100

Answer 1

In an open economy equilibrium we have Nastional Saving(NS) = I + NX where I = investmet and NX = Net exports(I.e. Exports - imports)

NS = Private saving + Public saving = 1000 + (-200)(here Public saving is negative because there is budget deficit)

=> NS = 800

Thus NS = I + NX => 800 = 700 + NX => NX = 100

So, NX = 100(This means that there is trade surplus of 100)

As, NX = NCO where NCO = net capital ouflow

=> NCo = net capital ouflow = 100

Hence, the correct answer is (b) The country has a net capital outflow of 100