Econ chapter 5 - OpenEconomy Spendingneednotequaloutput

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Open Economy -Spending need not equal output Saving need not equal investment  Nation Income identity- Y=C+I+G+NX or NX=Y-(C+I+G) Y=Output (C+I+G)=Domestic spending EX=Exports=foreign spending on domestic goods IM=Imports=Cf+If+Gf=spending on foreign goods NX=Net exports (AKA the “trade balance”)=EX-IM Trade surplus= NX Trade deficit= -NX Net capital outflow= S-I =Net outflow of “loanable funds” =Net purchases of foreign assets minus foreign purchases of domestic assets -Net lender= S > I -Net borrower= S < I U.S.: “The world’s largest debtor nation” Every year since 1980s: huge trade deficits and net capital inflows, i.e. net borrowing from abroad o As of 12/31/2008:U.S. residents owned $19.9 trillion worth of foreign assets o Foreigners owned $23.4 trillion worth of U.S. assets o U.S. net indebtedness to rest of the world: $3.5 trillion--higher than any other country, hence U.S. is the “world’s largest debtor nation” Assumptions about capital flows A. Domestic & foreign bonds are perfect substitutes (same risk, maturity, etc .) B. Perfect capital mobility : no restrictions on international trade in assets C. Economy is small : cannot affect the world interest rate, denoted r * A & b imply r = r*
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C implies r* is exogenous Investment is still a downward-sloping function of the interest rate, but the exogenous world interest rate…determines the country’s level of investment. If the economy were closed… the interest rate would adjust to equate investment 
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This note was uploaded on 07/31/2011 for the course NUTRITION 101 taught by Professor Zahora during the Spring '11 term at Gardner-Webb.

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Econ chapter 5 - OpenEconomy Spendingneednotequaloutput

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