5 - Chapter 5 Saving and Investment in the Open Economy 87...

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Chapter 5 Saving and Investment in the Open Economy 87 2. The net increase in foreign assets equals a country’s current account surplus 3. A current account surplus implies a capital and financial account deficit, and thus a net increase in holdings of foreign assets (a financial outflow) 4. A current account deficit implies a capital and financial account surplus, and thus a net decline in holdings of foreign assets (a financial inflow) 5. Foreign direct investment: a foreign firm buys or builds capital goods a. Causes an increase in capital and financial account balance b. Portfolio investment: foreigners acquire U.S. securities; also increases capital and financial account balance 6. Summary: Equivalent measures of a country’s international trade and lending Current account surplus = capital and financial account deficit = net acquisition of foreign assets = net foreign lending = (if NFP and net unilateral transfers are zero) net exports Numerical Problem 6 looks at the balance of payments when there are internationally traded assets. F) Box 5.1: Does Mars have a current account surplus? 1. Adding together all countries’ current account balances gives a current account deficit for the world 2. The statistical problem is primarily a misreporting of income from assets held abroad G) Application: The United States as international debtor 1. The rise in foreign liabilities by the United States since the early 1980s has been very large 2. The United States has become the world’s largest international debtor 3. But the net foreign debt of the United States relative to U.S. GDP is relatively small (18%) compared to other countries (some of whom have net foreign debt of over 100% of GDP) 4. Despite the large net foreign debt, the United States has direct foreign investment (companies, land) in other countries about equal in size to other countries’ foreign direct investment in the United States 5. What really matters is not size of net foreign debt, but country’s wealth (physical and human capital) a. If net foreign debt rises but wealth rises, there’s no problem b. But U.S. wealth isn’t rising as much as net foreign debt, which is worrisome II. Goods Market Equilibrium in an Open Economy (Sec. 5.2) A) From Ch. 2, S = I + CA = + ( NX + ) (5.2) 1. So national saving has two uses: a. Increase the capital stock by domestic investment b. Increase the stock of net foreign assets by lending to foreigners 2. To get goods market equilibrium, national saving and investment must equal their desired levels: a. d = + = + ( + ) (5.3) b. Goods market equilibrium in an open economy c. Assuming net factor payments are zero, then = + (5.4)
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88 Abel/Bernanke • Macroeconomics, Fifth Edition 3. Alternative method: a. Y = C d + I + G + NX (5.5) b. = – ( + + ) (5.6) Net exports equal output ( ) minus absorption ( + + ) III. Saving and Investment in a Small Open Economy (Sec. 5.3) A) 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
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This note was uploaded on 04/14/2010 for the course ECONOMICS 2312 taught by Professor William during the Spring '09 term at 東京大学.

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5 - Chapter 5 Saving and Investment in the Open Economy 87...

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