Chapter 12 Flashcards
OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS
So far, our study of macroeconomics has largely ignored the economy’s interaction with other economies around the world.
One of the ten principles of economics is that trade can make everyone better off.
The study of an open economy raises new issues.
OPEN-ECONOMY MACROECONOMICS: Open vs. Closed Economy
Closed economy is an economy that does not interact with other economies in the world.
Open economy is an economy that interacts freely with other economies around the world.
THE INTERNATIONAL FLOWS OF GOODS AND CAPITAL
The Flow of Goods:
Exports, Imports, and Net Exports
An open economy interacts with other economies in two ways:
* It buys and sells goods and services in world product markets.
* It buys and sells capital assets such as stocks and bonds in world financial markets.
These two activities, as well as the close relationship between them, are discussed here.
THE INTERNATIONAL FLOWS OF GOODS AND CAPITAL Part 2
Exports are goods and services that are produced domestically and sold abroad.
Imports are goods and services that are produced abroad and sold domestically.
Net exports (or trade balance) is the value of a nation’s exports minus the value of its imports. NX (X - M)
THE INTERNATIONAL FLOWS OF GOODS AND CAPITAL: Trade Surplus, Trade Deficit, Balanced Trade
Trade surplus is an excess of exports over imports.
Trade deficit is an excess of imports over exports.
Balanced trade is a situation in which exports equal imports.
FIGURE 12.1 The Internationalization of the Canadian Economy
So the thing to look at your total imports, total exports and imports from United States and exports from the United States in relation to the Canadian economy.
It is important to note that in 2000, at least 50% of our GDP came from total exports.
(Instructor’s Note)
An important change in the Canadian economy since 1960 has been the increasing importance of international trade and finance.
The Flow of Financial Resources: Net Capital Outflow
Net capital outflow (NCO) is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.
Some of the variables that influence NCO:
- Real interest rates being paid on foreign assets (Canadian more interested in 10% US interest rate than 5% CAD)
- Real interest rates being paid on domestic assets (Canadian more interested in 10% CAD interest rate than 5% US)
- Perceived economic and political risks of holding assets abroad (Some countries can promise higher returns but they could be war torn and you could never see that money)
- Government policies that affect foreign ownership of domestic assets (You never want to sell missles or essential things to foreign as they could use it against you if the time comes)
The Equality of Net Exports and Net Capital Outflow
Net exports measure an imbalance between a country’s exports and its imports.
Net capital outflow measures an imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners.
NCO always equals NX:
NCO = NX
The Equality of NX and NCO Part 2: NX > 0
NX > 0: Trade Surplus
The country is selling more goods and services to foreigners than it is buying from them.
What is it doing with the foreign currency it receives from the net sale of goods and services abroad?
It must be using it to buy foreign assets.
Capital is flowing out of the country (i.e., NCO > 0).
The Equality of NX and NCO Part 3: NX < 0
NX < 0: Trade Deficit
The country is buying more goods and services from foreigners than it is selling to them.
How is it financing the net purchase of these goods and services in world markets?
It must be selling assets abroad.
Capital is flowing into the country (i.e., NCO < 0).
Trade Deficit
Export < Import
NX < 0
Y < C + I + G
S < I
NCO < 0
Balanced Trade
Export = Import
NX = 0
Y = C + I + G
S = I
NCO = 0
Trade Surplus
Export > Import
NX > 0
Y > C + I + G
S > I
NCO > 0
Saving, Investment, and Their Relationship
to the International Flows
Closed Economy: NCO = 0, S = I
Open Econony:
Y = C + I + G + NX
Y - C - G = I + NX
S = I + NX
S = I + NCO
Figure 12.2 National Saving, Domestic Investment, NCO
The graph. On the Left shows domestic investment in national saving as a percentage of GDP.
You can see that kind of move together in the same pattern. In that even at its peak for domestic investment, it only made-up 30% of GDP.
The graph on the right shows net capital outflow as a percentage of GDP.
From 1999 to 2008, net capital outflow turn positive thanks to increase in National Savings that made it possible for Canadians to not only satisfy the demand for domestic investment, but also to purchase foreign assets.
