In an open economy, a country can either pay for imports by running down its reserves, or by financial inflows. The payment for imports via reserves is easy to understand- an importer can go exchange currency for foreign currency, and pay for imports. But suppose this is not the case- there are no reserves left. How are payments for imports funded by financial inflows? How does this look like in practice?
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1 Answer
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A couple of examples:
- Selling off assets in exchange for imports. You sell some of your land to a foreigner in exchange for foreign currency, and use that to pay for imports.
- Foreign direct investment. A foreign company sets up a business in your country, and imports lots of raw materials and machinery in order to set everything up. These goods count as inputs, as they're coming into your country, but they're paid for by a foreign entity with foreign currency.
Both of these are kinds of financial inflows.
