ECO 304L Lecture 10: Lecture 10 Notes

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ECO 304L
M O S T A S H A R I, S H A L A H

Market for loanable funds in an open economy Households Households income comes from valueadded by US firms and NFIA Households divide income between consumption, net taxes, and private saving pr Y + NFIA = C +T + S Firms Valueadded by domestic firms comes from producing net exports, as well as C + I + G Y = C + I + G + NX Private Savings S = I + (G T) + (NX + NFIA) Private saving finances investment, government budget deficit, and (NX + NFIA) Current Account: CA = NX + NFIA Net Exports (NX) Revenue from selling exports minus payment for imports If NX > 0, there is more foreign currency supplied to buy US dollars and goods than being used to buy foreign goods Net Factor Income from Abroad (NFIA) If NFIA > 0, there is more foreign currency coming in from abroad to pay for home factors than leaving to pay foreign factors Use of foreign currency Pay foreign workers Buy foreign goods Buy foreign assets Build factories in a foreign country Buy foreign governmentfirm bonds (lend to foreign country) Put money in savings account abroad S + Sov= I + (NX + NFIA) If current account > 0 S > I Excess of foreign currency used to buy foreign assets (net capital outflow) If current account < 0 More dollars leaving country to pay for either foreign goods or workers Foreigners lending to the US to pay for investment (net capital inflow) Using US dollars Building factories in US Buying US governmentfirm bonds Put money in US savings account
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