ECON1010 Lecture Notes - Lecture 11: Arbitrage, Substitute Good, Price Level
Lecture 11
ACCOUNTS IN THE BALANCE OF PAYMENTS
1) What is the current account?
• The flow of goods and services
• Income (from investment or work)
• Current transfers (aid-consumption oriented, pensions)
• Interest repayments
2) What is the capital account? A small category
• Capital transfers (aid-investment oriented)
3) What is the financial account?
• Foreign investment (direct, portfolio
THE FLOW OF GOODS AND SERVICES
• What qualifies as exports and imports?
• Net exports (NX) are the value of a nation’s exports minus the value of its imports.
– What factors affect net exports?
– Net exports are also called the trade balance.
THE FLOW OF FINANCIAL RESOURCES
• Commonly group the capital and financial accounts together and call them net foreign
investment (NFI) or also net capital outflow (NCO)
– the purchase of foreign assets by domestic residents minus the purchase of
domestic assets by foreigners
RELATIONSHIP BETWEEN ACCOUNTS
• For an economy as a whole, we have:
NFI = CAB (current account balance)
– An identity
– a country can only consume more than it produces if foreigners are willing to
supply it with its capital
• An example to demonstrate: Australian firm sells wheat overseas
– With the foreign currency acquiring foreign assets or foreign goods and
services
SAVINGS, INVESTMENT AND NFI
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Document Summary
Income (from investment or work: the flow of goods and services, current transfers (aid-consumption oriented, pensions) A small category: capital transfers (aid-investment oriented, what is the financial account, foreign investment (direct, portfolio. The flow of goods and services: what qualifies as exports and imports, net exports (nx) are the value of a nation"s exports minus the value of its imports. Net exports are also called the trade balance. Relationship between accounts: for an economy as a whole, we have: A country can only consume more than it produces if foreigners are willing to supply it with its capital: an example to demonstrate: australian firm sells wheat overseas. With the foreign currency acquiring foreign assets or foreign goods and services. Savings, investment and nfi: how does nfi affect the market for loanable funds, now national saving have to be split between domestic and net foreign investment, i. e. s = i + nfi.
