Lecture 8 Flashcards
We assumed previously that NZ was a closed economy but this is not true. What is NZ and what does this mean?
NZ is a small open economy which means we interest with the rest of the world
What does “interacting with the rest of the world” involve?
buying and selling goods and services in world product markets and buying and selling financial assets
What is meant by financial assets?
foreign direct investment and foreign portfolio investment
On what page in the textbook can you find information about assets foreign direct investment and foreign portfolio investment?
page 750
What is the trade balance and what is it also known as?
it is also known as net exports and is calculated by the value of a nation’s exports minus the value of its imports
What causes a trade surplus?
when exports > imports
What causes a trade deficit?
when exports < imports
What causes balanced trade?
exports = imports
What is the current account balance?
The sum of net exports (NX) and net foreign income (NFI)
CAB = NX +
NFI
In recent years the trade balance/net exports has been mostly _________ and the NFI has been __________ and the current account account balance is ____________
positive
negative
negative
What is net capital outflow?
*also called net foreign investment (not income)
this is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
Does the purchase of a foreign asset by a domestic resident have a positive or negative impact on the NCO?
positive
Does the purchase of a domestic asset by a foreign resident have a positive or negative impact on the NCO?
negative
Give an example of net foreign income (not investment)
income from foreign shares or foreign aid to the Pacific Islands
Net capital outflows (NCOs, also called net foreign ________) make reference to the difference between the acquisition of foreign _______ by _________ residents and the acquisition of ________ assets by non-residents. Net capital outflows takes two forms: foreign _______ investment, and _______ investment. Foreign ________ investment implies actively __________ the asset or the interest bought, while portfolio investment requires no role at all in __________.
An open economy can therefore _______ and _______ assets in the financial markets, generating flows of _________.
NCO = Acquisition of __________ assets by residents – Acquisition of ________ assets by nonresidents
When the net capital outflow is _________, domestic residents are buying more ________ assets than foreigners are purchasing domestic assets. When it’s _________, foreigners are purchasing more _____ assets than residents are purchasing foreign assets.
Net capital outflows (NCOs, also called net foreign investment) make reference to the difference between the acquisition of foreign assets by domestic residents and the acquisition of domestic assets by non-residents. Net capital outflows takes two forms: foreign direct investment, and portfolio investment. Foreign direct investment implies actively managing the asset or the interest bought, while portfolio investment requires no role at all in management.
An open economy can therefore buy and sell assets in the financial markets, generating flows of capital.
NCO = Acquisition of foreign assets by residents – Acquisition of domestic assets by nonresidents
When the net capital outflow is positive, domestic residents are buying more foreign assets than foreigners are purchasing domestic assets. When it’s negative, foreigners are purchasing more domestic assets than residents are purchasing foreign assets.
What is the capital account balances (KAB)?
the difference between the total receipts from the sale of domestic assets to foreigners and the total payments abroad of purchasing foreign assets
An outflow is counted positively/negatively for the NCO and an inflow is counted positively/negatively
positively
negatively
The NCO is the negative of what?
capital account balance (KAB)
NCO = -KAB
What the capital account balance (KAB) is positive the NCO is greater than or less than 0?
NCO < 0
What the capital account balance (KCN) is negative then the NCO is greater than or less than 0?
NCO > 0
If there is no foreign earnings or transfers across international borders (NFI = 0), that the net capital outflow must be equal to what?
net exports
CAB = NX + NFI becomes NCO = NX
When a nation imports more than it exports, foreigns do what?
gain a claim on domestic assets
When a nation exports more than it imports, domestic residents do what?
gain a claim on foreign assets
Suppose a NZ farmer sells some wool to a french customer for €100 and is paid in cash. If the farmer holds on to the €100, what happens to the NX and NCO?
NX will increase by €100 because exports increased
NCO will also increase by €100 because the farmer is holding a foreign asset
Suppose a NZ farmer sells some wool to a french customer for €100 and is paid in cash. If the farmer buys €100 worth of French wine, what happens to the NX and NCO?
NX remains unchanged: exports increase by €100 due to the sale of the wool but then imports increase by €100 due to the purchase of the wine
NCO remains unchanged because there has been no purchase of foreign asset
Suppose a NZ farmer sells some wool to a french customer for €100 and is paid in cash. If the farmer exchanges the €100 into $NZ, what happens to the NX and NCO?
Because another NZer holds a foreign financial asset, NX and NCO both increase by €100
Why does the NCO and NX remain the same even after one of them has changed?
because there is some offsetting action due to currencies needing to be exchanged
What is the balance of payments condition?
The current account balance must equal the net capital outflow
CAB = NCO
For a closed economy, NX = _______ and NFI = _______
0
0
For a closed economy, S =
I (where S is national savings)
For an open economy, what is gross national disposable income (YD) equal to?
YD = C + I + G + (NX + NFI)
In an open economy, YD = ________ + _______ + _________ + (______ + ______).
Since national savings is S = _______ - _________ - ________, S can also = ______ + (________ + ________)
Since CAB = _______ + _______ and CAB = _________,
S = _________ + ________
YD = C + I + G + (NX + NFI)
S = YD - C - G S = I + (NX + NFI)
CAB = NX + NFI CAB = NCO
S = I + NCO
The difference between national savings and domestic investment is what?
net capital outflow
What are the two uses for domestic savings in an open economy?
(i) domestic investment
(ii) the purchase of foreign assets
In an open economy, domestic investment has what two sources?
(i) domestic savers
(ii) foreign funds
