Lecture # Chapter 12
Open Economy Macroeconomics – Basic Concepts
Net Exports (Trade Balance):
• Net exports = Exports – Imports
Export: goods and services that are produced domestically and sold abroad
Import: goods and services that are produced abroad and sold domestically.
What affects the trade balance?
• Exchange Rate
• Transportation Costs
• Government Trade policies
Which industry is the largest in terms of Canadian export?
Net Capital Outflow
• The purchase of foreign assets by domestic residents minus the purchase of domestic
assets by foreign residents.
• Also called Net Foreign Investment (NFI)
What affects NCO?
• Real interest rate on domestic and foreign assets
• Economic and political risk of holding assets abroad • Government policies affecting foreign ownership of domestic assets
Type of Foreign Investment
• Foreign Direct Investment: Acapital investment that is owned and operated by a
foreign entity. (day to day control)
• Foreign Portfolio Investment: An investment that is financed by a foreign entity, but
operated by domestic residents. (Eg. Stocks and bonds)
Which of the following would be Canadian foreign direct investment?
ACanadian canning factory opens a plant in Ecuador
Equality of NX and NCO
• NCO = NX
• When a firm sells a good to a foreigner, the firm receives a good or an asset of equal
value in return.
• Money is an Asset
Saving and Investment in an Open Economy