Question

Which of the following is true with zero capital account balance?

Select one:

a. Net exports of foreign assets cause a decrease in external wealth.

b. Net exports of home assets cause an increase in external wealth.

c. Net imports of foreign assets cause a decrease in external wealth.

d. Financial flows do not affect a nation's international investment position.

Answer 1

Ans. Option a

When capital account balance is zero then foreign assets held by domestic country is equal to the domestic assets held by the rest of the world and external wealth of a nation is the net of foreign assets held by domestic country and domestic assets held by the rest of the world. Thus, net exports of foreign assets i.e. sale of foreign held assets is more than the purchase of foreign held assets by the home country which will eventually lead to a decrease in external wealth.

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