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Lecture 7

ECON 222 Lecture Notes - Lecture 7: Open Economy, Capital Account, Real Interest RatePremium


Department
Economics
Course Code
ECON 222
Professor
Mike Kennedy
Lecture
7

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ECON 222 Lecture 7 Saving and Investment in the Open Economy
Balance of payment accounting
*Transaction involves a flow of fund into Canada as a credit (+)
Out of Canada (-)
*Current account
Measure a country’s trade in currently produced goods and services,
along with net transfers between countries.
Components
1. Net export of goods and services (NX)
Export – import
Import country- debit- (-)
Export country- credit- +
2. Investment income from assets abroad
3. Current transfer
*Investment import from assets abroad
Investment is income received from assets abroad includes interest
payments, dividends, royalties…
Net investment income from abroad=income- payment to other countries
NPF (net payment factors) includes wage from another country, but it only
takes a small component. Therefore, Investment Income from assets
abroad almost equal to NPF.
*Current transfer
Payment to another country do not include purchase of goods and services.
Example: foreign aid, gift of one country give to another country
*Current account balance
Credit items-debit items
*The capital and financial account
Records in existing assets e.g. house
Financial inflow: home countries as a credit in capital account (sells an asset)
Financial outflow: debit in home countries in capital account (buys and asset)
*The official settlements balance (Balance of payment)
Net increase in a country’s official reserve assets.
The relationship between the current account and the capital account
CA=current account balance
KA=capital account balance
CA+KA=0
*Net foreign asset
The value of foreign assets and foreign liability changes
The country acquires new foreign assets or incurs new liability
The national Income accounting identity
S=I +CA= I+ (NX+NFP)
It states that there are two ways of increase saving. The first one is increase
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