5. consumption and saving in the open economy

5. consumption and saving in the open economy - Saving and...

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Saving and Investment in the Open Economy 28 September 2010 1 Reading Chapter 5 of Abel/Bernanke/Croushore 2 Balance of Payments Accounting De f nition 1 The balance of payments accounts are records of a country’s interna- tional transactions. As a general rule, a f ow of funds into the country is considered a credit (positive) item; a f ow of funds out of the country is counted as a debit (negative) item. In turn, the balance of payments accounts are made up of the current and capital accounts. De f nition 2 The current account measures a country’s 1. trade in currently produced goods and services, or its net export 2. net income from abroad 3. net unilateral transfers Net export in turn can be broken down into two categories, net trade in goods and in services. The latter category includes tourism, insurance, education, f nancial services, etc. For instance, when a HK student attends university in America, HK is deemed to import educational service from the U.S., and the payment of tuition by the student’s parent is considered a debit item in HK’s BOP account. The expenses a mainland company paid to a HK f nancial institution for arranging its IPO in HK is deemed a revenue HK earns from its export of f nancial service, and is considered a credit item in HK’s BOP account. 1
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Net income from abroad is essentially the same as NFP. A HK’s resident capital income from her ownership of stocks in America is a credit item in HK’s current account. The wage a foreign domestic helper in HK earns is a debit item in HK’s current account. Net unilateral transfers are payments from a country to another that do not corre- spond to the purchase of any good, service, or asset. Examples are o cial foreign aid or a gift of money your rich uncle in Brazil sends you. For most countries, these amounts are often insigni f cant compared to the other two components of the current account and we shall ignore them hereinafter, and write CA = NX + NFP. The current account is said to be in surplus if the balance is positive and in de f cit otherwise. Suppose that the current account is in surplus because of a positive NX .T h e n the country should be receiving more funds from selling goods and services to other countries than it is paying others overseas. But if the surplus is not matched by a corresponding de f cit in NFP , the receipts and payments do not match. Are we then just giving out our goods and services to others for free? The answer is of course no, and that the surplus must be channelled into the purchase of foreign assets, items recorded in the so—called capital account. De f nition 3 The capital account records international transactions involving assets, either real or f nancial, and can be made by either 1. the private sector or 2. the country’s central bank, transactions known as o
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This note was uploaded on 11/07/2010 for the course ECONOMICS econ2102 taught by Professor Proftse during the Spring '10 term at HKU.

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5. consumption and saving in the open economy - Saving and...

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