Macro Unit 3

Macro Unit 3 - MicroUnit3...

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Micro Unit 3  09/05/2010 01:25:00 1. What is a trade deficit? Trade surplus?  Trade deficit: imports> exports o Seen in countries with high levels of domestic demand Domestic Demand= C + I+ G  S<I  S= Y-C-G  **Remember, S-I= NX **  o Overall…  EX<IM  NX<0  Y<C+I+G  S<I  CF<0  Trade surplus: exports> imports  o Seen in countries with low levels of domestic demand (high savings)  S>I  Low consumption not consuming everything, so must be sending it  away  o Overall…  EX>IM  NX>0 
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Y>C+I+G  S>I  CF>0  Trade surplus/deficit is a function of domestic demand***  2. What is net capital outflow? How does an increase in savings affect net capital outflow?  An increase in investment?  CF  o = flow of funds out- flow of funds in  o Outflow- inflow  o =Amount of domestic funds flowing out- amount of foreign funds flowing in  o =Net foreign investments   o think lending abroad  Increase in Savings  o Increase in CF  The increase in savings (seen in the loanable funds model)   decrease in r  (domestic)   increase in I ;   increased CF (inclined to lend abroad b/c  would earn a higher rate than domestically), means increased outflow  Increase in investment  o  Increase in r  decrease in CF (rather lend domestically)  Decrease outflow  3. What is the relationship between the trade balance and net capital outflows?  Balanced Trade  o EX=IM   o NX=0  o Y=C+I+G 
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o S=I  o CF=0 
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This note was uploaded on 04/18/2011 for the course ECON 312 taught by Professor Rapach during the Spring '08 term at Saint Louis.

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Macro Unit 3 - MicroUnit3...

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