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ECON 1BB3 (535)

1BB3 Notes chapter 12.docx

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Bridget O' Shaughnessy

Lecture # Chapter 12 Macroeconomics 1BB3 Date: 11/12/2012 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? • Taste • Prices • Exchange Rate • Income • Transportation Costs • Government Trade policies Which industry is the largest in terms of Canadian export? Energy Product 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 • Why? • 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
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