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WA-4 MACRO MLA - La Rosa1 Melissa La Rosa Dr Edmondson...

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La Rosa1 Melissa La Rosa Dr. Edmondson Macroeconomics 2/7/12 Written Assignment #4 The relationship between savings and investment rates and its implication on International capital mobility is of interest to open macroeconomics for several reasons. For example, the extent of economic development of a small open country could exceed its domestic savings depends on how readily the country is accessible to international capital markets. The extent to which public deficits crowd out domestic investment also depends on the degree of international capital mobility. Higher savings leads to lower investments; higher savings also means lower consumption and hence lower capital outflow. A nation’s savings and investments are crucial to its long-run economic growth. Savings, investments and international capital flows are inextricably linked. When a nation’s savings exceeds its domestic investment it’s net capital outflow is positive, indicating that the nation is using some savings to buy assets aboard. When a nation’s domestic investments exceeds its savings it net capital outflow is negative, indicating that foreigners are financing some investment by purchasing domestic assets. The economic logic behind the theory of purchasing-power parity is exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries. The key implication of this theory is that nominal exchange rates change when price levels change. The principal is based on the law that one price, and asserts that a good must sell for the same price in all locations, otherwise there would be opposites for profit left unexploited. This theory is not completely accurate, exchange rates don’t always move to ensure that a dollar
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La Rosa2 has same value in all countries all the time. There are two reasons this theory of Purchasing- Power doesn’t always hold true. The first reason is that many goods are not easily traded, for instance wine is more expensive in Italy where most is made than Florida. International travelers would avoid buying wine in Italy in mass quantity due to prices, such arbitrage would be too limited to elimate the difference in prices. The deviation from Purchasing-Power might persist, and a dollar would
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