07 Saving and Investment in the Open Economy

07 Saving and Investment in the Open Economy - Agenda...

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1 7-1 Saving and Investment in the Open Economy 7-2 Agenda • Balance of Payments Accounting. • Goods Market Equilibrium in an Open Economy. • Saving and Investment in a Small Open Economy. • Saving and Investment in a Large Open Economy. 7-3 Balance of Payments Accounts 7-4 Balance of Payments Accounting • The Balance of Payments Accounts are a summary of a country’s net international transactions. ¾ Credit items represent international receipts. ¾ Debit items represent international payments.
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2 7-5 Balance of Payments Accounting • Basic Principles: ¾ Credit items (+) are funds flowing into a country. • Exports of goods and services, • Investment income on foreign assets owned by domestic residents, • Transfers to domestic residents, • Net purchases of domestic assets by foreign residents. ¾ This represents the demand for the domestic currency (in the foreign exchange market). 7-6 Balance of Payments Accounting • Basic Principles: ¾ Debit items (–) are funds flowing out of a country: • Imports of goods and services, • Investment payments on domestic assets owned by foreign residents, • Transfers to foreign residents, • Net purchases of foreign assets by domestic residents. ¾ This represents the supply for the domestic currency (in the foreign exchange market). 7-7 Balance of Payments Accounting • The Balance of Payments Accounts consists of: ¾ The current account balance, CA , ¾ The capital and financial account balance, KFA , and ¾ The official settlements account balance, OSA. 7-8 Balance of Payments Accounting • The Current Account balance, CA, consists of: ¾ Net exports of goods and services (NX) , ¾ Net income from abroad (NFP) ,and ¾ Net unilateral transfers (NUT).
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3 7-9 Balance of Payments Accounting • The Current Account balance, CA : ¾ Net exports of goods and services, (NX) : • Exports, X , (a credit item). MINUS • Imports, M , (a debit item). • For most countries, net exports, X – M , are the largest part of the current account and they are hugely negative for the U.S. 7-10 Balance of Payments Accounting • The Current Account balance, CA : ¾ Net income from abroad (NFP): • Investment income on foreign assets owned by domestic residents, (a credit item). MINUS • Investment payments on domestic assets owned by foreign residents, (a debit item). • For most countries, net income from abroad is a relatively small part of the current account and is about equal to net factor payments, NFP . 7-11 Balance of Payments Accounting • The Current Account balance, CA : ¾ Net unilateral transfers (NUT): • Transfers to domestic residents, (a credit item). MINUS • Transfers to foreign residents, (a debit item).
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This note was uploaded on 02/08/2011 for the course UGBA 101b taught by Professor Wilcox during the Summer '08 term at University of California, Berkeley.

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07 Saving and Investment in the Open Economy - Agenda...

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