Suppose that the real return from operating factories in Mexico rises relative to the real rate of return in Canada. What are the effects of this transaction?
A) This will increase Canadian net capital outflow and decrease Mexican net capital outflow.
B) This will decrease Canadian net capital outflow and increase Mexican net capital outflow.
C) This will only affect Canadian net capital outflow.
D) This will only affect Mexican net capital outflow.

Question

Quizplus · Accepted Answer

When the real return from operating factories in Mexico rises relative to the real rate of return in Canada, investors are likely to shift their capital from Canada to Mexico to take advantage of the higher returns. This increases Canadian net capital outflow (as more capital leaves the country) and decreases Mexican net capital outflow (as the country receives more foreign investment).

Suppose That the Real Return from Operating Factories in Mexico