Internation trade in goods and assets Flashcards
country has low income but expects higher income in the future
- When a country’s income is low but is expected to increase in the future, it can benefit by borrowing money from other countries to invest in its economy and maintain stable consumption levels.
- This can be done by selling bonds to foreigners now and promising to repay the debt in the future. It allows firms and households in the country to access funds for investment and consumption.
country expecting low growth or a decline in income
- if a country expects low economic growth or a decrease in income, it may benefit by lending money to other countries.
- This can be achieved by buying bonds from foreigners now and receiving payments from those bonds in the future. The country can then use these payments for consumption or investment.
Balance of payments
Record of all the economic transactions that a country has with the rest of the world over a specific period. It includes transactions related to goods, services, income, and financial assets.
Accounts of the balance of payments
Accounts of the balance of payments: BOP = CA + FA: The balance of payments is divided into two main accounts: the current account (CA) and the financial account (FA). The sum of these two accounts equals the balance of payments.
Current account
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current account: CA = NX + NFIA: The current account includes two main components:
- Net exports (NX): This is the value of a country’s exports minus the value of its imports. It represents the trade balance.
- Net foreign income (NFIA): This is the difference between income earned from owning foreign assets and the income foreign entities earn from owning domestic assets.
Financial account
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Financial account (FA), also known as ‘capital and financial account’: The financial account records international transactions involving financial assets. It includes:
- Foreign net acquisitions: This refers to purchases of domestic assets by foreigners minus sales of foreign assets by domestic entities.
- Domestic net acquisitions: This refers to purchases of foreign assets by domestic entities minus sales of domestic assets by foreigners.
GNP
𝐺𝑁𝑃 = 𝑌 + 𝑁𝐹𝐼
* GNP also includes net foreign income 𝑁𝐹�
Private saving
Private saving: 𝑆𝑝 = 𝑌 + 𝑁𝐹𝐼 − 𝑇 − 𝐶
* Disposable income minus consumption 𝐶, where the private sector receives
domestic income 𝑌, net foreign income 𝑁𝐹𝐼, and pays taxes net of transfers T
GNP
𝐺𝑁𝑃 = 𝑌 + 𝑁𝐹𝐼 (net foreign income)
how can a country save (2)
A country can save by either investing in its domestic capital stock (buildings, machinery, etc.) or by running a current account surplus (𝐶𝐴 > 0), which means it exports more than it imports and earns more from abroad than it pays to other countries.
What does a financial account deficit mean
A financial account deficit (𝐹𝐴 < 0) means the country is lending money to, or buying assets from, other countries.
Why do net foreign assets grow when the current account is in a surplus
This surplus contributes to the accumulation of net foreign assets over time, as Italy receives more income from abroad than it pays out. As a result, Italy’s net foreign assets continue to grow, reflecting its increasing ownership of assets abroad.
What is a small open economy
An SOE is not large enough to affect what happens in other
countries or in world markets
* The country is a price taker in competitive world markets
* The country can be affected by what happens in the rest of the world,
but there is no feedback from it to the rest of the world
Why does CA + CA’ need to equal 0
Any deficit or surplus in the first period must be offset by an opposite deficit or surplus in second period
What is CA in the first period considering investment is 0
NX
