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07 Saving and Investment in the Open Economy

07 Saving and Investment in the Open Economy - Agenda...

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1 7-1 Saving and Investment in the Open Economy 7-2 Agenda Balance of Payments Accounting. Goods Market Equilibrium in an Open Economy. Saving and Investment in a Small Open Economy. Saving and Investment in a Large Open Economy. 7-3 Balance of Payments Accounts 7-4 Balance of Payments Accounting The Balance of Payments Accounts are a summary of a country’s net international transactions. ¾ Credit items represent international receipts. ¾ Debit items represent international payments.
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2 7-5 Balance of Payments Accounting Basic Principles: ¾ Credit items (+) are funds flowing into a country. Exports of goods and services, Investment income on foreign assets owned by domestic residents, Transfers to domestic residents, Net purchases of domestic assets by foreign residents. ¾ This represents the demand for the domestic currency (in the foreign exchange market). 7-6 Balance of Payments Accounting Basic Principles: ¾ Debit items (–) are funds flowing out of a country: Imports of goods and services, Investment payments on domestic assets owned by foreign residents, Transfers to foreign residents, Net purchases of foreign assets by domestic residents. ¾ This represents the supply for the domestic currency (in the foreign exchange market). 7-7 Balance of Payments Accounting The Balance of Payments Accounts consists of: ¾ The current account balance, CA , ¾ The capital and financial account balance, KFA , and ¾ The official settlements account balance, OSA. 7-8 Balance of Payments Accounting The Current Account balance, CA, consists of: ¾ Net exports of goods and services (NX) , ¾ Net income from abroad (NFP) , and ¾ Net unilateral transfers (NUT).
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3 7-9 Balance of Payments Accounting The Current Account balance, CA : ¾ Net exports of goods and services, (NX) : • Exports, X , (a credit item). MINUS • Imports, M , (a debit item). For most countries, net exports, X – M , are the largest part of the current account and they are hugely negative for the U.S. 7-10 Balance of Payments Accounting The Current Account balance, CA : ¾ Net income from abroad (NFP): Investment income on foreign assets owned by domestic residents, (a credit item). MINUS Investment payments on domestic assets owned by foreign residents, (a debit item). For most countries, net income from abroad is a relatively small part of the current account and is about equal to net factor payments, NFP . 7-11 Balance of Payments Accounting The Current Account balance, CA : ¾ Net unilateral transfers (NUT): Transfers to domestic residents, (a credit item). MINUS Transfers to foreign residents, (a debit item).
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