ECON 100B Lecture Notes - Lecture 5: Real Interest Rate, Exogeny, Perfect Competition

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cerisegiraffe538

12 Feb 2018

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Econ 100b - lecture #5 - saving and investment in closed and open economies, part 2. Open economies are ones that engage in international trade so that: exports are positive, i. e. x > 0, and. 2: net exports can be positive, negative, or zero, i. e. nx (cid:0) or (cid:0) 0. Imports and positive, i. e. m > 0, while. National income is given by: y = c + i + g + nx. National saving is given by: s = y - c - g. (goods market equilibrium) is given by: s = i + nx or s - i = nx (net exports is the difference between saving and investment) Since these are identities and true by definition, for a country as a whole, trade agreements do not matter for the amount of net exports. Assume there is perfect (financial) capital mobility. I. e. , there are no restrictions on (financial) capital flows between domestic and foreign residents.

Related Questions

5. Saving and net flows of capital and goods In a closed economy, saving and investment must be equal, but this is not the case in an open economy. In the following problem, you will explore how saving and investment are connected to the international flow of capital and goods in an economy. Before delving into the relationship between these various components of an economy, you will be asked to recall some relationships between aggregate variables that will be useful in your analysis. Recall the components that make up GDP. National income (Y) equals total expenditure on the economy's output of goods and services. Thus, where C = consumption, I = investment, G = government purchases, X = exports, M = imports, and NX = net exports: Y = Also, national saving is the income of the nation that is left after paying for . Therefore, national saving (S) is defined as: S = Rearranging the previous equation and solving for Y yields Y = . Plugging this into the original equation showing the various components of GDP results in the following relationship: S = This is equivalent to S = , since net exports must equal net capital outflow (NCO, also known as net foreign investment). Now suppose that a country is experiencing balanced trade. Determine the relationships between the entries in the following table, and enter these relationships using the following symbols: > (greater than), < (less than), or = (equal to). Outcomes of Balanced Trade Imports Exports 0 Net Exports Y C+I+G Investment Saving Net Capital Outflow 0

ochreduck773

Assume that in a small open economy where full employment always prevails, national saving is 300.

a.	If the domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed?
b.	If the economy is open and the world interest rate is 10 percent, what will the investment be?
c.	What will the current account surplus or deficit be? What will net capital outflow be?

erincrocodile695

Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.

C = 0.8(DI) + 1000	C = Consumption expenditure, DI = Disposable Income
I = 2000	I = Investment expenditure
G = 1000	G = government expenditure
X = 1600	X = spending on exports
M = 1800	M = spending on imports
DI = Y - T	Y = real GDP, T = tax revenues/>
T = 1000
Yp = 12000	Yp = Potential GDP

Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.

	a.	inflationary gap
	b.	recessionary gap
	c.	no output gap
	d.	government budget surplus
	e.	government budget deficit
	f.	balanced government budget
	g.	trade deficit
	h.	trade surplus
	i.	net exports of zero

pucearmadillo585

ECON 100B Lecture Notes - Lecture 5: Real Interest Rate, Exogeny, Perfect Competition

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