Question

If U.S. residents purchase $600 billion worth of foreign assets and foreigners purchase $300 billion worth of U.S. assets,
a.

U.S. net capital outflow is $300 billion; capital is flowing into the U.S.
b.

U.S. net capital outflow is -$300 billion; capital is flowing out of the U.S.
c.

U.S. net capital outflow is $300 billion; capital is flowing out of the U.S.
d.

U.S. net capital outflow is -$300 billion; capital is flowing into the U.S.

Answer 1

To calculate U.S. net capital outflow (NCO), you use the formula:

\[ \text{NCO} = \text{Outflow} - \text{Inflow} \]

In this case:

- U.S. residents purchase $600 billion in foreign assets (this is capital outflow).
- Foreigners purchase $300 billion in U.S. assets (this is capital inflow).

Substituting the values into the formula:

\[ \text{NCO} = 600 \, \text{billion} - 300 \, \text{billion} = 300 \, \text{billion} \]

So, U.S. net capital outflow is $300 billion, and because residents are buying more foreign assets than foreigners are buying U.S. assets, capital is flowing out of the U.S.

Therefore, the correct answer is:

**c. U.S. net capital outflow is $300 billion; capital is flowing out of the U.S.**