Chapter_17.docx

Chapter_17.docx - Ch. 17 Macroeconomics in an Open Economy...

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Ch. 17 Macroeconomics in an Open Economy The Balance of Payments: Linking the United States to the International Economy There are two types of economies: Open economies interact by trading goods and services and by making investments in each other’s economies. A closed economy has no interactions in trade or finance with other countries. The balance of payments is a record of a country’s trade with other countries in goods, services, and assets. The balance of payments contains three accounts: the current account, the financial account, and the capital account. A. The Current Account The current account records a country’s net exports, net investment income, and net transfers. The balance of trade is the difference between the value of the goods a country exports and the value of the goods a country imports. Net exports equal the sum of the balance of trade and the balance of services. B. The Financial Account The financial account records purchases of assets a country has made abroad and foreign purchases of assets in the country. There is a capital outflow from the United States when an investor in the United States buys a bond issued by a foreign company or government or when a U.S. firm builds a factory in another country.
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There is a capital inflow into the United States when a foreign investor buys a bond issued by a U.S. firm or by the government or when a foreign firm builds a factory in the United States. When firms build or buy facilities in foreign countries, they are engaging in foreign direct investment. When investors buy stock or bonds issued in another country, they are engaging in foreign portfolio investment . Net capital flows is the difference between capital inflows and capital outflows. Net foreign investment is the difference between capital outflows from a country and capital inflows also equal to net foreign direct investment plus net foreign portfolio investment. C. The Capital Account The capital account records relatively minor transactions, such as migrants’ transfers and sales and purchases of nonproduced, nonfinancial assets. D. Why Is the Balance of Payments Always Zero? The sum of the current account balance, financial account balance, and the capital account balance equals the balance of payments. The balance of payments is always zero. To make the balance on the current account equal the balance on the financial account, the balance of payments includes an entry called the statistical discrepancy. If the balance on the capital account was included, the statistical discrepancy takes on a value equal to the difference between the current account balance and the sum of the balance on the financial account and the balance on the capital account. If it does not equal zero, a measurement error must have occurred. Some imports or
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This note was uploaded on 02/25/2010 for the course ECON 2010 taught by Professor Roussel during the Spring '08 term at LSU.

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Chapter_17.docx - Ch. 17 Macroeconomics in an Open Economy...

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