Explain how the following transactions would affect U.S. net capital outflow. For each transaction, state whether it represents direct investment or portfolio investment. a. An American cellular phone company establishes an office in the Czech Republic. b. Harrods of London sells stock to the General Motors pension fund. c. Honda expands its factory in Marysville, Ohio. d. A Fidelity mutual fund sells its Volkswagen stock to a French investor.

Direct investment refers to an investment where a company or individual takes a significant stake in a foreign venture, creating a lasting interest and a degree of influence over its management. This kind of investment often means setting up physical assets like factories, offices, or branches abroad.

Examples of direct investment can include an American company building a factory overseas or acquiring a controlling interest in a foreign company. Transaction (a) from the exercise, where an American cellular phone company establishes an office in the Czech Republic, and transaction (c), where Honda expands its factory in Ohio, are both examples of direct investments, even though they have opposite effects on U.S. net capital outflow. The former increases it because it's an investment going out of the U.S., while the latter decreases it, as it's a foreign investment coming in.

Portfolio investment involves the purchase of securities like stocks and bonds, which offer a financial return, without taking an active management role in the companies issuing those securities. It's different from direct investment because it's essentially about buying a piece of a company or lending money to an entity, rather than operating a business.

In the given transactions, (b) and (d), represent portfolio investments. In (b), the General Motors pension fund purchasing stock from Harrods increases U.S. net capital outflow as the investment is leaving the country to purchase foreign assets. Conversely, in (d), a U.S. mutual fund selling its Volkswagen stock to a French investor decreases U.S. net capital outflow as it brings money into the United States.

Foreign investment is any investment made by an individual, company, or entity into business interests located in another country. It encompasses both direct and portfolio investments but is characterized primarily by the investor's nationality or the investment destination.

For example, the Honda expansion in the U.S. (transaction (c)) is a foreign direct investment into the U.S. because the investor is a Japanese company. Foreign investments can have various impacts on a country's economy, including influencing its net capital outflow or inflow.

Economic transactions encompass all transactions between residents of a country and the rest of the world. These can be classified into several categories such as goods, services, primary income (like wages), secondary income (like remittances), and capital transfers. Direct and portfolio investments form a significant component of the financial account within economic transactions.

Each of the economic transactions in the exercise affects the U.S. net capital outflow. As such, understanding these transactions helps in analyzing the broader economic implications for international trade and investment flows. Transactions that involve the U.S. acquiring foreign assets increase net capital outflow, while those involving foreign investors acquiring U.S. assets decrease net capital outflow.