Which of the following statements is correct for an open economy with a trade surplus?
A)The trade surplus cannot last for very many years.
B)The trade surplus must be offset by negative net capital outflow.
C)The trade surplus implies that the country's national saving is greater than domestic investment.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

A trade surplus means that a country's exports exceed its imports. This implies that the country is earning more foreign currency than it is spending on foreign goods. In an open economy, this excess foreign currency is used to purchase foreign assets, such as stocks or bonds. This is known as positive net capital outflow. This means that Choice B is incorrect. Given that national saving consists of domestic saving plus net capital outflow, a trade surplus implies that net capital outflow is positive. Therefore, domestic saving must also be positive, which means that national saving must be greater than domestic investment. Choice A is incorrect because there is no reason why a trade surplus cannot last for many years, and Choice D is incorrect as well.

Which of the Following Statements Is Correct for an Open