ECON BC 3033x Lecture Notes - Lecture 6: U.S. 500, Portfolio Investment, Capital Account
4 Oct 2016
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Open economy y=c + i +g +nx. Purchasing power parity real exchange rate of what you can buy. Identical basket of goods in both countries. Arbitrage buy in one market sell for another. Drive up price in inexpensive country & supply in expensive country. Can"t sell services or goods that perish. What chinese producers can do w/ payments from us. Buy us goods (export for us) doesn"t really happen. Financial account (foreign direct investment + portfolio investment) i-s. Capital account (very small, just for statistical discrepancies) 0. If us imports more than exports, larger investment in us. In us more investment than savings bc foreigners are driving that. In china, more savings than investment bc workers are investing overseas. Devaluation good for trade balance, exports increase, imports decrease. Exchange rate price of which interactions are made. Demand for us goods lower than initially expected, dollar depreciates, current account deficit shrinks.
