Suppose you are the Purchasing Manager for a large chain of restaurants in the United States, and you need to make your semiannual purchase of tea. You pay $1,500,000 for a shipment of tea from an Indian tea producer. (1) What is the impact of this purchase on US imports and capital flows?
(2) What is the impact of this transaction on US net exports?

Answer with Explanation:

Requirement 1.

The US import will increase by $1,500,000 due to purchase of indian tea product and this import of tea would result in increase of capital outflow as the Net export particular to importation is negative hence capital outflow is genuine effect.

Requirement 2.

The Net exports can be calculated as under:

Net Exports = Exports - Imports  = 0 - $1,500,000 = - $1,500,000

The US Net Exports would decrease by $1,500,000.

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