Macroeconomics plus MyEconLab plus eBook 1-semester Student Access Kit (6th Edition)

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Chapter 5 Saving and Investment in the Open Economy Learning Objectives I. Goals of Chapter 5 A) Develop the idea that a country’s spending need not equal its production in every period, due to foreign trade B) The fundamental determinants of a country’s trade position are its saving and investment decisions II. Notes to Fifth Edition Users A) The application on the LDC debt crisis was deleted but is available in this instructor’s manual if you would like to continue using it B) A new application on the impact of globalization on the U.S. economy has been added C) The application on the 1994 Mexican crisis has been deleted but is available in this instructor’s manual if you would like to continue using it D) A new application on recent trends in the U.S. current account deficit has been added Teaching Notes I. Balance of Payments Accounting (Sec. 5.1) A) Balance of payments accounts 1. The record of a country’s international transactions 2. Text Table 5.1 shows recent U.S. data 3. Any transaction that involves a flow of money into the United States is a credit ( + ) item (enters with a plus sign); for example, exports 4. Any transaction involving a flow of money out of the United States is a debit (–) item (enters with a minus sign); for example, imports 5. In touch with the macroeconomy: the balance of payments accounts Data released quarterly in Survey of Current Business B) The current account 1. Net exports of goods and services 2. Net income from abroad a. Income received from abroad is a credit item, since it causes funds to flow into the United States b. Payment of income to foreigners is a debit item c. Net income from abroad is part of the current account, and is about equal to NFP , net factor payments
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94 Abel/Bernanke/Croushore • Macroeconomics, Sixth Edition 3. Net unilateral transfers a. Payments made from one country to another b. Negative net unilateral transfers for United States, since United States is a net donor to other countries 4. Sum of net exports of goods and services, net income from abroad, and net unilateral transfers is the current account balance a. Positive current account balance implies current account surplus b. Negative current account balance implies current account deficit Students may be helped if you draw the basic balance of payments chart without numbers, but with + and – signs, so they can see more clearly where the different entries go: Debit (–) Credit ( + ) Current Account Net exports Exports of goods __________ Exports of services __________ Imports of goods __________ Imports of services __________ Net income from abroad Income receipts from abroad __________ Income payments to foreigners __________ Net unilateral transfers Transfers from foreigners __________ Transfers to foreigners __________ Capital and Financial Account Capital account __________ Financial account Increase in foreign-owned assets __________ Increase in U.S.-owned assets abroad __________ Data Application Though the U.S. government generally is a net donor to other countries, providing significant amounts of aid for development, in 1991 the U.S. government received billions of dollars from
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