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Net Exports Equal Net Foreign Investment quiz

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  • What must a country do if it imports more than it exports?
    It must finance the difference by either selling assets to foreigners or borrowing from them.
  • What are the two main types of net foreign investment?
    Foreign Direct Investment (physical capital) and Foreign Portfolio Investment (financial assets).
  • How does selling a surfboard to Japan affect U.S. net exports?
    It increases U.S. net exports because a U.S. good was sold overseas.
  • What happens to net foreign investment when a U.S. citizen receives yen for an export?
    Net foreign investment increases because the U.S. citizen now holds a foreign asset (yen).
  • If Marco uses his yen to buy a Japanese bond, what type of investment is this?
    It is a foreign portfolio investment because he is buying a financial asset in a foreign country.
  • What is the effect on net exports if Marco uses his yen to buy a Nintendo system?
    Net exports return to zero because the value of the export is offset by the value of the import.
  • Why must net exports equal net foreign investment?
    Because the difference between exports and imports is financed by net foreign investment, maintaining a balance.
  • What is foreign direct investment?
    It is the purchase or building of physical capital, like factories or land, in a foreign country.
  • What is foreign portfolio investment?
    It is the purchase of financial assets, such as stocks or bonds, in a foreign country.
  • How does importing more than exporting affect a country's finances?
    The country must sell assets or borrow from foreigners to finance the excess imports.
  • What happens when a foreign company builds a factory in the U.S.?
    It counts as foreign direct investment in the U.S. and increases foreign ownership of U.S. assets.
  • If a U.S. citizen buys stock in a foreign company, what is this called?
    It is called foreign portfolio investment.
  • What does it mean if net exports are zero?
    It means the value of exports equals the value of imports, so there is no net foreign investment.
  • How does the sale of a good overseas affect net foreign investment?
    It increases net foreign investment because the exporter acquires a foreign asset in exchange.
  • What is the macroeconomic significance of the relationship between net exports and net foreign investment?
    It ensures that any imbalance in trade is exactly offset by changes in ownership of foreign or domestic assets.