CH15, CH10, CH16: Open Economy Macro

Question 1

Define the Trade Balance

Answer 1

AKA net exports.
Trade deficit is when balance is negative (M>X).
Trade surplus is when balance is positive (X>M).

Question 2

Factors that affect Net Exports?

Answer 2

• Tastes of consumers for domestic and foreign goods.
• The price of goods at home and abroad.
• The exchange rates at which people can use domestic currency to buy foreign currencies.
• Income of consumers at home and abroad.
• Cost of transporting goods between countries.
• Govt policies to trade.

Question 3

What is the Balance on Payments?

Answer 3

Consists of: Current Account (merchandise trade, services trade, international investment income, current transfers) and Capital Account (changes in financial liabilities and assets, sales and purchases of fixed assets).

Question 4

Current Account Contents?

Answer 4

• Net Exports.
• Receipts of income and transfers from abroad.
• Payments of income and transfers to abroad.

If NZ earns less income from properties and assets they own abroad than foreigners earn from their assets and properties in NZ, it will make a net outflow of payments to abroad.

Question 5

Capital Account Contents?

Answer 5

• Changes in financial liabilities and assets.
• sales and purchases of fixed assets.

When NZ helps Fiji to build roads and bridges, capital transfer from NZ.
When overseas buys NZD denominated Uridashi or Eurokiwi bonds, it represents a financial capital inflow to NZ.
When Bank of NZ buys US bonds, financial capital outflow.

Question 6

Relationship between Current Account and Capital Account?

Answer 6

• Current and capital accounts must sum to zero. Current account deficit must be matched by capital account surplus and vice versa.

Question 7

2 Issues with External Debt?

Answer 7

• Rising overseas claims caused by persistent current account deficits.
• Ready availability of overseas capital encourages national overspending.

Question 8

Define Net Capital Outflow

Answer 8

Purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

Influences:

• Real interest rates being paid on foreign assets.
• Real interest rates being paid on domestic assets.
• Perceived economic and political risks of holding assets abroad.
• Govt policies that affect foreign ownership of domestic assets.

Question 9

Relationship between saving, investment, relationship to NCO.

Answer 9

National Saving (S) = Domestic Investment (I) + Net Capital Outflow (NCO).