Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what directions this changes U.S. net exports and U.S. net capital outflow.

The purchase of a foreign good by a U.S. resident is a U.S. import. Since net exports = exports - imports, net exports decrease. Bill pays for the software with U.S. dollars so the Japanese have obtained more U.S. assets. Since, net capital outflow = the amount of foreign assets acquired by domestic residents - domestic assets acquired by foreign residents, the increase in foreign holdings of dollars by Japanese residents decreases U.S. net capital outflow.