When a U.S. firm sells a good abroad for, say, 100 euros (assume $1.5=1euro) , U.S. net exports increase by $150. These $150 in exports can be accounted for as $150 increase in capital outflow because ________.
A) private consumption in the foreign country increases by $150
B) If the U.S. firm uses the 100 euros to buy a share of stock in a foreign firm, the firm is supplying U.S. capital to that foreign firm
C) If the U.S. firm uses the proceeds to buy a U.S. bond, capital investment in the foreign country has increased.
D) all of the above
E) none of the above

Question

Quizplus · Accepted Answer

Option B is the correct choice because when a U.S. firm uses the proceeds from selling a good abroad to buy a share of stock in a foreign firm, it is supplying U.S. capital to that foreign firm. This increases capital outflow from the U.S. and hence, increases U.S. net exports by the same magnitude. Option A is incorrect because an increase in private consumption in the foreign country does not necessarily mean an increase in capital outflow from the U.S. Option C is incorrect because if the U.S. firm uses the proceeds to buy a U.S. bond, it does not increase capital investment in the foreign country.

When a US Firm Sells a Good Abroad For, Say, 100 Euros