Question

State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy:

(a) Mexico imports services from Japan.

(b) Mexico exports goods to Canada.

(c) U.S. investors receive a return from past financial investments in Mexico.

Short answer

(a) Financial flow out of the Mexican economy.

(b) Financial flow to the Mexican economy.

(c) Financial flow out of the Mexican economy.

Step-by-step solution

Step 1. Meaning of financial flow.

Financial flow refers to the flow of money in and out of the economy. It is carried on through exports and imports of goods and services.

Part (a). Step 1. Mexico imports services from Japan.

When Mexico imports services from Japan, the country has to make payments to Japan in return for the services it purchased. There is financial flow out of the Mexican economy.

Part (b). Step 1. Mexico exports goods to Canada.

When Mexico exports goods to Canada, the country receives payments from Canada in return for the goods it purchased. There is a financial flow to the Mexican economy.

Part (c). Step 1. U.S. investors receive a return from past financial investments in Mexico.

When U.S. investors receive a return from past financial investments in Mexico, the country is transferring money to the investors which is an outflow from the economy. There is a financial flow out of the Mexican economy.