9. MyNotes

9. MyNotes - Topic 9: Macroeconomics in an Open Economy...

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Topic 9: Macroeconomics in an Open Economy Chapter 5 and 10 Modern economies are open economies, which means that they engage in international trade of goods and services and in international borrowing and lending Economic openness is of tremendous benefit to the avg person consumers can enjoy products from around the world Internationalization of financial markets also means that Canadian savers have the opportunity to purchase German gov’t bonds or share in Taiwanese companies as well as domestic assets Canadian firms who want to finance investment projects can borrow in London or New York as well as in Toronto or Montreal In an open economy, a country’s spending need not equal its production in every period In particular, by importing more than they export and borrowing from abroad to pay for the difference, the residents of an open economy can temporarily spend more than they produce an opportunity or a potential problem In an open economy, desired national saving does not need to equal desired investment If a country’s desired national saving exceeds its desired investment, the country will be a lender in the international capital market current account surplus Balance of Payments Accounting These are the record of a country’s international transactions Any transaction that involves a flow of funds into Canada is a credit item and is enter with a plus sign and transactions that involves a flow of funds out of Canada is a debit item and is enter with a minus sign The Current Account The Current account measures a country’s trade in currently produced goods and services, along with net transfers between countries
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Current account is divided into three separate components: (1) Net exports of goods and services Net exports are often broken down into 2 categories; merchandise (goods) and services Merchandise consists of currently produced goods, such as American soybeans, French perfume When a Canadian buys French perfume, the transaction is recorded as a merchandise import for Canada (debit item, because funds flow out of Canada to pay for the item) and a merchandise export for France (credit item, funds flow into France to pay for the perfume) Merchandise trade balance: the difference b/w a country’s merchandise exports and its merchandise imports Internationally traded services include transportation, tourism, insurance, education, and financial services Ex: when a Canadian family is on vacation in Mexico, the family’s expenditure for accommodations, food, sightseeing tours are counted in the Canadian current accounts as an import of tourism services (debit) (2) Investment income from assets abroad These include interest payments, dividends, royalties, and other returns that residents receive from assets (bonds, stocks, patents) that they own outside their own country Ex: interest that Canadian saver receives from French gov’t bond he or she owns
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9. MyNotes - Topic 9: Macroeconomics in an Open Economy...

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