Assignment 7
Principles of macroeconomics
Due date: May, Friday 9th.
Chapter 32:
Exporting to France
Liam is a freelance programmer based in California. He sells a mobile app to a client in
France for 7,000 euros.
What is the effect on U.S. net exports and net capital outflows (NCO) in each of the
following cases?
A. Liam holds on to the 7,000 euros in a bank account in France. US: NX , NCO
B. Liam uses the 7,000 euros to buy French bonds. US: NX , NCO
C. Liam spends the 7,000 euros on French wine. NX = NCO = 0
D. Liam exchanges the 7,000 euros into U.S. dollars and deposits them in his U.S. bank
account. NCO = 0
U.S. NX , NCO
Importing Coffee from Vietnam
A U.S.-based supermarket chain imports $8,000,000 worth of coffee from Vietnam.
What is the effect on U.S. net exports and net capital outflows (NCO) in each of the
following cases?
A. Vietnam uses the $8 million to buy U.S. Treasury bonds.
B. Vietnam uses the $8 million to import American agricultural equipment. NX = NCO = 0
C. Vietnam buys $8 million worth of stock in a U.S. coffee company. NX NCO
NX = NCO
Explain what happens to U.S. net exports and NCO in each of these cases. In each case,
confirm that NX = NCO.
A. A Japanese customer buys a U.S.-made electric bike.
B. An American student pays tuition to a university in Canada.
C. A Brazilian investor buys a Florida apartment.
A. A service import lowers NX, and payment to a foreign
institution reduces U.S. capital outflows, so again, NX = NCO
(both decrease).
B. The export adds to NX and the payment results in capital
outflow (U.S. gains a foreign asset), so NX = NCO (both
increase).
C. This keeps NX = NCO consistent.
Saving and Investment
Given:
U.S. GDP (Y) = $20 trillion
Consumption (C) = $13 trillion
Government spending (G) = $4 trillion
Investment (I) = $3 trillion
Question:
A. Calculate national savings. 3 trillion
B. If NX = NCO, find the value of NCO. The value of NCO is $0 trillion.
C. Is the U.S. running a trade surplus or deficit? Justify your answer.
The U.S. is running a trade deficit, as the net exports (NX) are negative. This means the U.S. is
importing more than it is exporting.
Understanding Trade Flows
For each situation, identify whether the country is experiencing a trade surplus or trade
deficit. Support your answer using the relationships among exports, imports, savings,
investment, and net capital outflows.
A. A country where exports = $700B, imports = $600B, investment = $800B, saving =
$900B.
B. A country where domestic spending (C + I + G) = $1.5 trillion, but GDP = $1.4 trillion.
C. A country with NCO < 0 and S < I.
A. Since net exports (NX) are positive ($100B), the country is running a trade surplus.
B. Since domestic spending is greater than GDP, this implies the country is importing more
than it is producing. To satisfy this, the country needs to be borrowing from abroad, which
indicates a trade deficit.
C. When NCO < 0, it means that capital outflows are negative, meaning the country is
importing more capital than it is exporting. This is characteristic of a trade deficit.
