Principles of Economics- Mankiw (5th) 639

Principles of Economics- Mankiw (5th) 639 - CHAPTER 29...

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CHAPTER 29 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 661 increasing trade illustrated in Figure 29-1 is a phenomenon that most econo- mists and policymakers endorse and encourage. THE FLOW OF CAPITAL: NET FOREIGN INVESTMENT So far we have been discussing how residents of an open economy participate in world markets for goods and services. In addition, residents of an open economy participate in world financial markets. A U.S. resident with $20,000 could use that money to buy a car from Toyota, but he could instead use that money to buy stock in the Toyota corporation. The first transaction would represent a flow of goods, whereas the second would represent a flow of capital. The term net foreign investment refers to the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. When a U.S. resident buys stock in Telmex, the Mexican phone company, the purchase raises U.S. net foreign investment. When a Japanese resident buys a bond issued by the U.S. government, the purchase reduces U.S. net foreign investment.
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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