Q4. Exports pay for imports. Yet in ... [FREE SOLUTION]

Chapter 21: Q4. (page 450)

Exports pay for imports. Yet in 2018, the nations of the world exported about $891 billion more of goods and services to the United States than they imported from the United States." Resolve the apparent inconsistency of these two statements.

Short Answer

Expert verified

The higher amount of imports (world鈥檚 exports) in the US than the amount of exports (world鈥檚 imports) suggests a current account deficit situation. This deficit results in unfinanced imports, and hence the statement of export paying for import is not consistent with the situation.

Step by step solution

Import and export: direction of cashflows

Importing goods and services causes cash outflow while exporting goods and services brings money back into the economy.This follows credit and debit of cash, signifying positive and negative signs on the current account of the balance sheet.

Any inconsistency will lead to a non-zero balance on the balance of the payment statement

When US imports exceed exports in the world market

The world's nations exported $891 billion more of goods and services than the United States, yet their import from the US economy is less.

Generally, the money received from exports pays for imports, but it was not true for the world's nations in 2018. The balance of payment statement of the US in 2018 reveals that foreign purchase of assets in the United States was +$765. This signifies that all the money generated from the export of goods and services to the United States was used to purchase US economy assets rather than financing imports.

This is why the balance of payment statement of the US economy shows current account deficit and capital and financial account surplus in 2018.