What does the identity "net capital outflow = net exports" imply?
A) The supply of dollars equals the demand for dollars in the foreign-currency market.
B) National saving equals domestic investment.
C) The volume of exports equals the volume of imports.
D) Canadian investment abroad is equal to foreign investment in Canada.

Question

Quizplus · Accepted Answer

This identity implies that the supply of dollars, which comes from the country's net exports, equals the demand for dollars in the foreign-currency exchange market, which is driven by net capital outflow. When a country has a net export surplus, it means it is selling more goods abroad than it is buying, leading to an inflow of foreign currency that needs to be exchanged for the domestic currency, thus increasing the supply of the domestic currency in the foreign exchange market. Conversely, net capital outflow occurs when a country invests more abroad than foreign entities invest in it, increasing the demand for foreign currency and thus the demand for dollars in the foreign exchange market if the country's currency is the dollar.

What Does the Identity "Net Capital Outflow = Net Exports