Closed economy: an economy that doesn’t interact with other economies in the world
Open economy: an economy that interacts freely with other economies around the
The Flow of goods: exports, imports, and net exports
Exports: goods and services that are produced domestically and sold abroad.
Imports: goods and services that are produced abroad and sold domestically.
Net exports: the value of a nation’s exports minus the value of its imports (trade
(+) – country sells more than it buys [trade surplus: excess of exports over
(-) – country buys more than it sells [trade deficit: excess of imports over
Balanced trade: exports equal imports.
International trade increase because of transportation (cheaper and more efficient)
and telecommunications, which help reach consumers easier.
Technological progress (films), government trade policies allowed
The flow of financial resources: net capital flow
Net capital outflow: the purchase of foreign assets by domestic residents minus
the purchase of domestic assets by foreigners
(+): domestic residents are buying more foreign assets than foreigners are
buying domestic assets. [capital flowing out of economy]
(-):domestic residents are buying less foreign assets than foreigners are buying
domestic assets. [capital flowing into the economy-inflow]
Foreign direct investment: mcdonalds opens in Russia (active role in investment)
Foreign portfolio investment:American buys stock in a Russian corporation
(passive role in investment)
Equality of Net Exports and Net Capital Outflow
Net capital outflow must always equal net exports
NCO = NX
When running a trade surplus (NX > 0), it uses foreign currency to buy foreign
assets and capital flows out of the countr