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ECN204 - Chapter 12 .doc

5 Pages

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ECN 204
Christos Shiamptanis

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ECN204Chapter 12 NotesClosed vs Open EconomiesoA closed economy does not interact with other economies in the worldoAn open economy interacts freely with other economies around the worldIt buys and sells goods and services in world product marketsIt buys and sells capital assets in world financial marketsThe Flow of Goods and ServicesoExports domesticallyproduced goods and services sold abroadoImports foreignproduced goods and services sold domesticallyoNet Exports NX aka the trade balancevalue of exportsvalue of importsVariables that Influence Net ExportsoConsumers preferences for foreign and domestic goodsoPrices of goods at home and abroadoIncomes of consumers at home and abroadoThe exchange rates at which foreign currency trades for domestic currencyoTransportation costsoGovernment policiesTrade Surpluses and DeficitsoNX measures the imbalance in a countrys trade ingoods and servicesTrade Deficit an excess of imports over exportsTrade Surplus an excess of exports over importsBalanced Trade when exportsimportsThe Flow of CapitaloNet Capital Outflow NCO domestic residents purchases of foreign assets minus foreigners purchases of domestic assetsNCO is also called net foreign investmentWhen a Canadian resident buys stock in Telmex the Mexican phone company the purchase raises Canadian net capital outflowoThe flow of capital abroad takes two formsForeign direct investment Domestic residents actively manage the foreign investment eg Tim Hortons opens a fast food outlet in Russia that is an example of foreign direct investmentForeign portfolio investment Domestic residents purchase foreign stocks or bonds supplying loanable funds to a foreign firmoIn both cases Canadian residents are buying assets located in another country so both purchases increase Canadian net capital outflowoNCO measures the imbalance in a countrys trade in assetsWhen NCO0 capital outflowDomestic purchases of foreign assets exceed foreign purchases of domestic assetsoCapital is flowing out of the countryWhen NCO0 capital inflow
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