In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:
A) -$25 billion.
B) -$10 billion.
C) $10 billion.
D) $25 billion.

Question

Quizplus · Accepted Answer

Net capital outflow (NCO) equals the difference between domestic national saving (S) and domestic investment (I): NCO = S - I. 
Since S = $25 billion, we need to find I. We can use the accounting identity: 
Y = C + I + G + NX
where Y is the output or income of the economy, C is consumption, G is government spending, and NX is net exports (exports - imports). 
We can rearrange the equation to solve for I: 
I = Y - C - G - NX
Since this is a small open economy, we can assume that G is small or equal to zero. We also know that NX equals -$10 billion ($20 billion in exports minus $30 billion in imports). So, 
I = Y - C - (-$10 billion)
I = Y - C + $10 billion
We don't have information about Y and C, but we can use the fact that national saving equals investment: S = I. 
Substituting S = $25 billion and solving for I, we get: 
$25 billion = I + (-$10 billion)
I = $35 billion
So, NCO = S - I = $25 billion - $35 billion = -$10 billion.

In a Small Open Economy, If Exports Equal $20 Billion