International Capital Flows and the Trade Balance

The national income accounts identity shows that net capital outflow always equals the trade balance. 

Y = C + I + G + NX.

Subtract C and G from both sides 

Y − C − G = I + NX.

Y − C − G is national saving S, which equals the

sum of 

private saving, Y − T − C, 

 public saving, T − G, where T stands for

taxes. Therefore,

S = I + NX.

Subtracting I from both sides of the equation, we can write the national income

accounts identity as

S − I = NX.

Balance of trade (BOT) is the difference between the value of a country's exports and the value of a country's imports for a given period. The balance of trade is also referred to as the trade balance, the international trade balance, commercial balance, or the net exports.

Capital outflow is the movement of assets out of a country. A positive NCO means that the country invests outside more than the world invests in it.

Net Capital Outflow = Trade Balance

                           S − I = NX.

Trade Surplus

If S − I and NX are positive. In this case, we are exporting more goods than we are importing.

Trade Deficit

If S − I and NX are negative .in this case we are importing more goods than we are exporting. 

Trade Balance

If S − I and NX are exactly zero, we are said to have balanced trade because the value of imports equals the value of exports.

Ten principles of economics