Chapter 31 -- Carlos Pitta

Trade deficit an excess of imports over exports trade

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Trade deficit : an excess of imports over exports Trade surplus : an excess of exports over imports Balanced trade : when exports = imports 0
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The U.S. Economy’s Increasing Openness 0% 5% 10% 15% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Exports Imports Percent of GDP Trade deficit = 6% of GDP in 7/2005 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 12 The Flow of Capital Net capital outflow (NCO) : domestic residents’ purchases of foreign assets minus foreigners’ purchases of domestic assets NCO is also called net foreign investment . 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 13 The Flow of Capital The flow of capital abroad takes two forms: Foreign direct investment : Domestic residents actively manage the foreign investment, e.g., McDonalds opens a fast-food outlet in Moscow. Foreign portfolio investment : Domestic residents purchase foreign stocks or bonds, supplying “loanable funds” to a foreign firm. 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 14 The Flow of Capital NCO measures the imbalance in a country’s trade in assets: When NCO > 0, “capital outflow” Domestic purchases of foreign assets exceed foreign purchases of domestic assets. When NCO < 0, “capital inflow” Foreign purchases of domestic assets exceed domestic purchases of foreign assets. 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 15 Variables that Influence NCO real interest rates paid on foreign assets real interest rates paid on domestic assets perceived risks of holding foreign assets govt policies affecting foreign ownership of domestic assets 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 16 The Equality of NX and NCO An accounting identity: NCO = NX arises because every transaction that affects NX also affects NCO by the same amount (and vice versa) When a foreigner purchases a good from the U.S., U.S. exports and NX increase the foreigner pays with currency or assets, so the U.S. acquires some foreign assets, causing NCO to rise. 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 17 The Equality of NX and NCO An accounting identity: NCO = NX arises because every transaction that affects NX also affects NCO by the same amount (and vice versa) When a U.S. citizen buys foreign goods, U.S. imports rise, NX falls the U.S. buyer pays with U.S. dollars or assets, so the other country acquires U.S. assets, causing U.S. NCO to fall. 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 18 Saving, Investment, and International  Flows of Goods & Assets Y = C + I + G + NX accounting identity Y C G = I + NX rearranging terms S = I + NX since S = Y C G S = I + NCO since NX = NCO When S > I , the excess loanable funds flow abroad in the form of positive net capital outflow. When S < I , foreigners are financing some of the country’s investment, and NCO < 0. 0
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CHAPTER 31 OPEN ECONOMY MACRO: BASIC CONCEPTS 19 Case Study:  The U.S. Trade Deficit In 2004, the U.S. had a record trade deficit.
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