ECON 001 Lecture Notes - Lecture 22: Autarky, Exchange Rate, Negative Relationship
Chapter 31 The Open Economy
I. The Open Economy
Chapter 26: Y: C + I + G (closed economy)
Chapter 31 Y: C + I + G + NX (open economy)
NX= net exports = exports - imports
Exports- domestically produced and sold abroad
IM- foreign produced goods sold domestically
A. Definitions
1. If NX > 0, then we have trade surplus (EX > IM)
2. If NX < 0, then we have trade deficit (EX < IM)
3. If NX = 0, balanced trade.
B. Measuring Flow of Financial Assets
●Financial assets (bonds + stocks) can also be exchanged between countries
●Net Capital Outflow (NCO)- measures flow of financial assets between countries
●NCO = (Amount of foreign assets purchased by domestic investor) - (amount of
domestic assets purchased by foreign investor)
Two Scenarios
Scenario #1: Domestic investors are buying more foreign assets than foreigners are buying
domestic assets. NCO > 0. Capital is flowing out of the country
Scenario #2: Foreign investors are buying more domestic assets than domestic investors are
buying foreign assets. NCO < 0. Capital is flowing into the country.
C. Net Exports (NX) and Net Capital Output (NCO)
●NX used to measure the flow of goods and services
●NCO measures financial assets
●Key Point: It is always true that NX = NCO
II. Savings + Investment in Open Economy
In open economy: Y = C + I + G + NX
Rearrange: Y - C - G = I + NX (Y - C - G = national savings)
S = I + NX → ← S = I + NCO(I = domestic investment and NCO = foreign investment)
Document Summary
Chapter 31 the open economy: the open economy. Chapter 26: y: c + i + g (closed economy) Chapter 31 y: c + i + g + nx (open economy) Im- foreign produced goods sold domestically: definitions. If nx > 0, then we have trade surplus (ex > im) If nx < 0, then we have trade deficit (ex < im) If nx = 0, balanced trade: measuring flow of financial assets. Financial assets (bonds + stocks) can also be exchanged between countries. Net capital outflow (nco)- measures flow of financial assets between countries. Nco = (amount of foreign assets purchased by domestic investor) - (amount of domestic assets purchased by foreign investor) Scenario #1: domestic investors are buying more foreign assets than foreigners are buying domestic assets. Scenario #2: foreign investors are buying more domestic assets than domestic investors are buying foreign assets. Capital is flowing into the country: net exports (nx) and net capital output (nco)
