Lecture notes - open1

Lecture notes - open1 - Open Economy Macroeconomics (part...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Open Economy Macroeconomics (part 1) 1. Goods Market Equilibrium in an Open Economy Income-Expenditure Identity: Y = C + I + G + NX Private saving: S P = Y + NFP – T – C NFP (net factor payment): Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy. Public savings: S G = T – G National savings: S = Y + NFP – C – G Replace Y in the national savings equation by ( C + I + G + NX ), get goods market equilibrium condition in an open economy: S = I + CA. (CA: current account balance, CA = NX + NFP) 2. Saving and Investment in a Small Open Economy Small open economy: an economy too small to affect the world real interest rate. (1) World real interest rate ( r w ): the real interest rate in the international capital market (2) Key assumption: Residents of the small open economy can borrow or lend at the expected world real interest rate (3) Result: r w may be such that S d > I d , S d = I d , or S d < I d S, I Real interest rate, r S I r w = r1 Foreign lending CA > 0
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
S, I Real interest rate, r S I r w = r2 CA = 0 S, I Real interest rate, r S I r w = r3 Foreign borrowing CA < 0 If r w = r 1 , then S d > I d , so the excess of desired saving over desired investment is lent internationally (net foreign lending is positive) and CA > 0 If r w = r 2 then S d = I d , so there is no net foreign lending and
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/12/2009 for the course ECON 291 taught by Professor J liu during the Spring '07 term at Simon Fraser.

Page1 / 5

Lecture notes - open1 - Open Economy Macroeconomics (part...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online