Chapter5_The Open Ecoomy

Chapter5_The Open Ecoomy - The International Flows of...

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1 The Open The Open Ecoomy Ecoomy Chapter 5 Chapter 5 P’ O Tuitional EBA Macroeconomics 2 The International Flows of Capital and Goods • We begin our study of open-economy macroeconomics by taking another look at national income accounting, which we discussed in chapter 2. • The role of Net Exports Î In an open economy, some output is sold domestically, and some is exported to be sold abroad. • We can divide expenditure into 4 components dd d Y CIGE X =+++ 3 • The sum of the first three terms, C d + I d + G d , is domestic spending. The fourth term, EX, is foreign spending on domestic goods and services. • Note that domestic spending on all goods is the sum of domestic spending on domestic goods and on foreign goods. • Hence, We substitute those three equations into the identity: Y df CC C =+ II I GG G superscripts: d = spending on domestic goods f = spending on foreign goods () ( ) ff f CC GG EX =− + +− + 4 • We can rearrange to obtain Y = C + I + G + EX – (C f + I f + G f ) Y = C + I + G + EX – IM Y = C + I + G + NX • The national income accounts identity shows how domestic output, domestic spending, and net exports are related. In particular, NX = –( C + + G ) Net export = Output Domestic spending If output exceeds domestic spending, we export the difference: net exports are positive. If output falls short of domestic spending, we import the difference: net exports are negative.
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5 Net foreign Investment and trade balance As we discussed, financial market and goods markets are closely related. To see the relationship, we must rewrite the national income accounts identity in terms of saving and investment. Recall, Y = C + I + G + NX Y–C–G=I+NX Recall again that, Y – C – G is national saving S, S = (Y-T-C) + ( T-G) National saving = Private Saving + Public Saving 6 • So, = + NX = NX • This equation shows the relationship between the international flows of funds for capital accumulation, S – I, and the international flow of goods and services, NX. Relax 7 • Now, girls, let’s look more closely. (S – I) Î net foreign investment or net capital outflow NX Î trade balance • Net foreign investment is the excess of domestic saving over domestic investment. Thus, S - I = NX Net foreign Investment = trade balance • If S – I & NX are positive Î trade surplus + Lender • If S – I & NX are negative Î trade deficit + borrower 8 Saving and Investment in a Small open economy Assumption of Small open economy:
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Chapter5_The Open Ecoomy - The International Flows of...

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