Lesson 2 Flashcards
Define Global Imbalance
The variations in current account balances
When Demand does not equal Supply how does it get adjusted?
Demand always adjusts to meet supply
What is the equation for National Savings?
S = Sp + Sg S = (Y-T-C) + (T-G) S = Y - C - G
What happens when Demand and Supply are not equal?
Net Borrowing: Supply < Demand
Net Lending: Supply > Demand
What is the equation for Net Capital Flow
Capital Outflows - Capital Inflows
National S - I
How are CA and NCF related?
CA = Yf - A CA = Yf - [C(Y-T) + G + I] CA = [Yf - C(Y-T) - G] - I CA = S - I CA = NCF
What does an Increase in Absorption Cause?
Reduces the size of CA = Y - A
Lowers the long-run equilibrium of CA balance
Lowers the long-run equilibrium of NCF
What are the results of an increase in Government spending?
Inflow of capital (borrowing) of the increase amount, from the ROW. Now the CA will decrease by that amount.
What are the results from a decrease in taxes?
Because of the MPC if there is a decrease in taxes of 10 million, we only borrow MPC x 10 which will equal the new CA deficit.
What is the Twin Deficits Hypothesis?
The proposition that expansionary fiscal policy (government budget deficits) leads to current account deficits
What is the Norway example?
Norway ran a large CA deficit for a while in order to fund oil production. They are not one of the richest countries, they were strategic about how they redistributed the wealth as not to destroy the original economy. Residents pay higher taxes, and are happy to do so
What are the Economic Consequences of a Current Account Deficit?
Net Income from ROW: R* x NFW where R is the world interest rate.
Net income can be positive or negative depending on NFW.
Yf (National Income) = Q (GDP) + [R* x NFW]
Define Inter-temporal Trade
Importing goods today (CA deficit) in return for exporting goods in the future (CA surplus)
Norway is a great example of this.
