Chapter 14: Macroeconomic in an Open Economy Flashcards
What is an open economy?
An economy that has interactions in trade or finance with other economies. Nearly all economies to varying degrees. Open economies interact by trading goods and services and by making investments in each other’s economies.
What is a closed economy?
An economy that has no interaction in trade or finance with other economies. No economy today is completely closed, although a few countries, such as North Korea, have very limited economic interactions with other countries.
What is a useful way to understand the interactions between one economy and other economies?
A balance of payments.
What is a balance of payments?
The record of a country’s international trade, borrowing, lending, capital and investment flows with other countries. The balance of payments contains three accounts: the current account, the capital account and the financial account.
What is the current account?
It records current, or short-term, flows of funds into and out of a country. The current account includes:
- Net exports
- Net primary income
- Net secondary income
What is net exports?
Income receive for exports minus the amount paid for imports of goods and services. If a country exports more than
What is net primary income?
Income received by Australian residents from investments in other countries, including profits dividends, rental income and interest repayments on foreign borrowing from Australia, minus income paid to overseas residents form investments in Australia.
What is net secondary income?
The difference between transfers made to Australian residents from other countries, minus transfers made to residents of other countries including overseas food aid, pensions and migrants’ funds.
What payments are positive and negative in the current account?
Any payments received by Australian residents are positive numbers in the current account, and any payments made by Australian residents are negative numbers in the current account.
What are the components of net exports?
Net exports of goods (AKA balance on merchandise trade) (right column): comprised of exports and imports of goods (left column).
Net exports of services (AKA net services) (right column): comprised of exports and imports of services (left column).
Balance on goods and services (right column in bold): represents the total of net exports of g=of goods and services
Summary of the balance of payments (LC = value written in middle column, RC = value written in right column, NV = no value because it’s a title).
CURRENT ACCOUNT Net exports: (NV) - Net primary income (LC) - Net secondary income (LC) Balance of merchandise (GOODS) TRADE (RC) - Exports of services (LC) - Imports of services (LC) Net services (RC) Balance on goods and services (RC)
Net Primary Income: (NV)
- Income into Australia (Credits) (LC)
- Income going overseas (debits) (LC)
Total net primary income (RC)
Net secondary income (NV)
- Transfers into Australia (credits) (LC)
- Transfers overseas (debits) (LC)
Total net secondary income (RC)
CURRENT ACCOUNT BALANCE (RC)
CAPITAL ACCOUNT BALANCE (RC)
FINANCIAL ACCOUNT
Net direct investment: (NV)
- Direct investment abroad (assets) (LC)
- Direct foreign investment in Australia (liabilities) (LC)
Total net direct investment (RC)
- Portfolio investment abroad (assets) (LC)
- Foreign portfolio investment in Australia (liabilities) (LC)
Total net portfolio investment (RC)
Financial derivatives (RC)
Other investment (RC)
Reserve Assets (RC)
FINANCIAL ACCOUNT BALANCE (RC)
CAPITAL AND FINANCIAL ACCOUNT BALANCE (RC)
Net errors and omissions (RC)
What is the capital account?
The part of the balance of payments that records migrants’ asset transfers, overseas debt relief, and sales and purchases of non-produced, non-financial assets.
What is the financial account?
The part of the balance of payments that records purchases of physical and financial assets a country has made abroad and foreign purchases of physical and financial assets in the country.
What is net foreign investment?
The difference between capital outflows from a country and capital inflows, also equal to net foreign direct investment + net foreign portfolio investment.
What is the difference between a firm that operates entirely in Australia and a multinational corporation?
A firm that operates entirely within Australia will price its products in Australian dollars and will use Australian dollars to pay suppliers, workers, interest to bond holders and dividends to shareholders.
A multinational corporation, in contrast, may sell its products in many different countries and receive payment in many different currencies.
