Textbook Notes (367,876)
Canada (161,461)
Economics (279)
ECON 1000 (180)
Chapter 12

Chapter 12

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Department
Economics
Course
ECON 1000
Professor
Troy Joseph
Semester
Winter

Description
Macroeconomics Chapter 12 Open-Economy Macroeconomics: Basic Concepts • Trade allows people 2 produce what they produce best & 2 consume the great variety of G&S produced around the world The International Flows of Goods and Capital • An open economy interacts w/ other economies by: o Buying & selling G&S in world product markets o Buying & selling capital assets such as stocks & bonds in world financial markets The Flow of Goods: Exports, Imports, and Net Exports • Net exports are also called Trade Balance • If net exports are positive, exports > imports  country sells more G&S abroad than it buys from other countries  the country runs a trade surplus • If net exports are negative, exports < imports  country sells fewer G&S abroad than it buys from other countries  the country runs a trade deficit • If net exports are zero, exports = imports  country has balanced trade The Flow of Financial Resources: Net Capital Outflow • Canadian with $20,000 uses the money to buy a car from Toyota  represents a flow of goods • Canadian uses the money to buy stock in the Toyota corporation  represents a flow of capital • Net Capital Outflow = Purchase of foreign assets by domestic residents – Purchase of domestic assets by foreigners • Canadian resident buys stock in a Mexican phone company  raises Canadian net capital outflow • Japanese resident buys bond issued by Canadian government  reduces Canadian net capital outflow • Tim Hortons opens a fast-food outlet in Russia  foreign direct investment • Canadian buys stock in a Russian corporation  foreign portfolio investment o Both of these increase Canadian net capital outflow b/c Canadian residents buying assets located in another country • Net capital outflow (aka net foreign investment) can be positive or negative • Positive  domestic residents buying more foreign assets than foreigners are buying domestic assets  capital is flowing out of the country • Negative  domestic residents buying less foreign assets than foreigners are buying domestic assets  capital is flowing into the country  country is experiencing a capital inflow • Variables that influence net capital outflow: Macroeconomics Chapter 12 Open-Economy Macroeconomics: Basic Concepts o Real interest rates being paid on foreign assets o Real interest rates being paid on domestic assets o Perceived economic and political risks of holding assets abroad o Government policies that affect foreign ownership of domestic assets The Equality of Net Exports and Net Capital Outflow • Net exports (NX) measures an imbalance b/w a country’s exports and imports • Net capital outflow (NCO) measures an imbalance b/w the amount of foreign assets bought by domestic residents & the amount of domestic assets bought by foreigners o These 2 imbalances must offset each other • NCO = NX • Every international transaction is an exchange • When a seller country transfers a G/S to a buyer country, the buyer country gives up some asset 2 pay 4 this G/S o The value of that asset = value of the G/S sold • When nation is running a trade surplus (NX > 0), selling more G&S to foreigners than it is buying from them, using the currency it receives from the net sale of G&S abroad 2 buy foreign assets. C
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