Upload
jeela1
View
217
Download
0
Embed Size (px)
Citation preview
7/28/2019 Open Economy- Ch 31
1/16
Open Economy
7/28/2019 Open Economy- Ch 31
2/16
Open Economy
Overview
Trade
Allows people to
produce what theyproduce best and
consume the great
variety of goods and
services produced
around the world.
Trade makes everyone
better off
Closed Economy
Open Economy
7/28/2019 Open Economy- Ch 31
3/16
International Flow of Goods and
Capital
Exports
Imports
Net exports (NX)
Value of CountrysExports- Value of
Countrys Imports
Net Exports is also
known as TradeBalance
Trade Balance can be
(Trade)Surplus or
Deficit
7/28/2019 Open Economy- Ch 31
4/16
Factors influencing on Countrys
IMPEX? Tastes of Consumers
for Domestic andForeign goods
The price of goods athome and abroad
The exchange rates atwhich people can usedomestic currency tobuy foreign currencies
The incomes of
consumers athome/abroad
Cost of transportation ofgoods
Govt. policies towards
international trade.
7/28/2019 Open Economy- Ch 31
5/16
Flow of Financial Resources-Net
Capital Outflow Capital flows
Sale /purchase of realor financial assets
Net Capital Outflow Purchase ofForeign
Assetby DomesticResidentsPurchase ofDomesticAssets by Foreigners
Buying of F-16s from
USA shall reflect asCapital outflow? T or F?
Setting up a Steel Mill inPakistan by USA shallreflect as Capital
inflow?
7/28/2019 Open Economy- Ch 31
6/16
Net Capital Outflow Capital flow takes in two
forms
Foreign Direct
Investment (FDI)
Opening up a ToyotaFactory in Pakistan by
Japan is a FDI
Foreign Portfolio
Investment.
Buying shares in PTCLby Abu Dhabi group
(UAE) is Foreign portfolio
investment
In both cases, capital is
flown out of Japan andUAE
7/28/2019 Open Economy- Ch 31
7/16
Important Variables that Influence
Net Capital Outflow
Investments are dearto everyone
Real interest rate paid
on foreign assets
Real interest ratespaid on domestic
assets
Perceived economic
risks of holding assets Govt. policies that
affect foreign
ownership of
domestic assets
7/28/2019 Open Economy- Ch 31
8/16
NCO= NX (Identity Equation)
NX measuresimbalance in countrys
exports and in its
imports
NCO measures
imbalance between
the amount of foreign
assets bought by
domestic residentsand the amount of
domestic assets
bought by foreign
residents.
7/28/2019 Open Economy- Ch 31
9/16
NCO=NX
Example US Software Engineer sells a software to Japanese
company
Receives 10,000 Yen
He has two choices Buy a Japanese Nintendo
Buy stocks in Japanese Stock market
7/28/2019 Open Economy- Ch 31
10/16
Buy a Nintendo
NX= Exports- Imports Exports= Software
Imports= Nintendo
NX= 10,000-10,000
NX= Zero
So NCO=NX
As exportsimports are zero, there is no effect on
NCO so NCO = zero
7/28/2019 Open Economy- Ch 31
11/16
Buy a Stock
Buying Japanese Stock Exports Software (+10,000)
Capital outflow (+10,000)
NCO=F.A Purchased-D.APurchased
Net Exports = +10,000
NCO= +10,000
NCO=NX
7/28/2019 Open Economy- Ch 31
12/16
Saving, Investment & Relationship
with International Flows
Y=C+I+G+NX (GDP)
Y - C - G = I + NX
Y-C-G= S (National Saving)
As NX =NCO so,
S = I + NCO That is why in a closed economy, we have S=I
(excluding NCO)
7/28/2019 Open Economy- Ch 31
13/16
Concluding the Debate
As NX=NCORise in NX results in Rise in NCO
People not only Invest in Domestic Economybut also send money abroad for investment
NX makes Y , so S
As Y-C-G=S NX+I=S
Y=C+I+G+NX
If there is Trade Surplus NX
7/28/2019 Open Economy- Ch 31
14/16
Relation Between NCO and NX
ExportsC+I+G Saving > Investment
Net Capital Outflow is >0TradeSurplus
7/28/2019 Open Economy- Ch 31
15/16
CASE STUDY
Is U.S Trade Deficit a NationalProblem?
7/28/2019 Open Economy- Ch 31
16/16