Trade Balances and Flows of Financial Capital

Self-Check Questions

State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:

  1. Export sales to Germany
  2. Returns paid on past U.S. financial investments in Brazil
  3. Foreign aid from the U.S. government to Egypt
  4. Imported oil from the Russian Federation
  5. Japanese investors buying U.S. real estate

Hint:

  1. An export sale to Germany involves a financial flow from Germany to the U.S. economy.
  2. The issue here is not U.S. investments in Brazil, but the return paid on those investments, which involves a financial flow from the Brazilian economy to the U.S. economy.
  3. Foreign aid from the United States to Egypt is a financial flow from the United States to Egypt.
  4. Importing oil from the Russian Federation means a flow of financial payments from the U.S. economy to the Russian Federation.
  5. Japanese investors buying U.S. real estate is a financial flow from Japan to the U.S. economy.

How does the bottom portion of Figure, showing the international flow of investments and capital, differ from the upper portion?

Hint:

The top portion tracks the flow of exports and imports and the payments for those. The bottom portion is looking at international financial investments and the outflow and inflow of monies from those investments. These investments can include investments in stocks and bonds or real estate abroad, as well as international borrowing and lending.

Explain the relationship between a current account deficit or surplus and the flow of funds.

Hint:

If more monies are flowing out of the country (for example, to pay for imports) it will make the current account more negative or less positive, and if more monies are flowing into the country, it will make the current account less negative or more positive.