ECON 120 chapter 18
In 2014, France's net foreign investment was negative. Thus, in 2014, France's investment was larger than its savings. Why?
A negative net foreign investment means a positive investment by foreigners in France by the amount of the excess of imports over exports. This happened because France's national saving was less than her domestic investment.
What is a "policy channel"?
A way in which a monetary or fiscal policy affects the domestic economy.
In the late 1990s, the United States had large budget surpluses and low-interest rates. All other things equal, these factors should have reduced the size of the current account deficit because
Budget surpluses mean increased public saving, and low-interest rates tend to reduce foreign investment in the U.S.
What is the impact of fewer buyers of U.S. debt?
Higher interest rates resulting in slower economic growth and lower employment.
Suppose that Federal Reserve policy leads to higher interest rates in the U.S. How would your open-economy answer change if interest rates in countries that are major trading partners of the United States also rise?
If the U.S. is a closed economy, in the short run, real GDP will decrease. If the U.S. is an open economy, real GDP will decrease by more than in a closed economy. Since interest rates increase worldwide, there would be little, if any, impact on the value of the dollar, and thus there would not be as much of a decrease in aggregate demand and real GDP as there would usually be in an open economy. The interest rate increase would not change the value of the dollar, so the decrease in aggregate demand would be less.
[Related to Solved Problem #3] Look again at Solved Problem #3, in which we derived the saving and investment equation S = I + NX. In deriving this equation, we assumed that national income was equal to Y. But Y only includes income earned by households. In the modern U.S. economy, households receive substantial transferslong dash—such as Social Security payments and unemployment insurance paymentslong dash—from the government. Suppose that we define national income to be equal to Y + TR, where TR equals government transfer payments, and we also define government spending to be equal to G + TR. Which of the following shows that after making these adjustments, we end up with the same saving and investment equation?
New saving equation S(private) + S(public) = (Y + TR − C − T) + (T − (G + TR)) remains the same as the old saving equation.
Given the following statement: "Because in 2014 national saving was a larger percentage of GDP in the United States than in the United Kingdom, domestic investment must also have been a larger percentage of GDP in the United States than in the United Kingdom." Do you agree with the statement? Why?
No. National saving is domestic investment plus net foreign investment (NFI). Domestic investment may exceed national saving by the absolute value of NFI. The domestic investment in the United States could have been a smaller percentage of its GDP than that in the United Kingdom.
How does the saving and investment equation explain why the United States experienced large current account deficits in the late 1990s?
S = I + NX = I + NFI. The large current account deficits, large negative NX (NFI), must be accounted for by an increase in I or a decrease in S, or both.
Why might the "continued willingness of foreign investors to buy U.S. stocks and bonds and foreign companies to build factories in the United States" result in the United States running a current account deficit?
The demand for U.S. assets increases the value of the dollar, which increases imports and reduces exports.
Current account deficits during the late 1990s actually increased. Which of the following is a reason why?
The strength of the U.S. stock market and the weakness of other economies made the U.S. an attractive place to invest.
In 2014, domestic investment in a country was 26.3 percent of GDP, and the country's national saving was 26.4 percent of GDP.
The country's net foreign investment was 0.1 percent of GDP.
Former Congressman and presidential candidate Richard Gephardt once proposed that tariffs be imposed on imports from countries with which the United States has a trade deficit. Assume that no other federal government economic policy is changed. If this proposal were enacted and if it were to succeed in reducing the United States current account deficit to zero,
domestic investment spending would be likely to decrease significantly.
The article further notes that the Reserve Bank of India (the central bank) stated that: "Financing the CAD (current account deficit) with increasingly risky and volatile flows increases the economy's vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability." When India's central bank refers to "risky and volatile flows" that finance their current account deficit, this The risky and volatile flows could threaten India's macroeconomic stability because
implies that foreign direct investment is volatile. sudden changes in foreign direct investment have signficant economic impacts.
When the government runs a budget surplus, national saving The "twin deficits" refers to the idea that
increases a government budget deficit may lead to a current account deficit.
An article in GulfNews.com noted that in September 2012 the Indian government of Prime Minister Manmohan Singh made "urgently needed reforms to reduce the fiscal deficit and attract foreign investment to help the current account deficit and growth." Source: "India's Central Bank Lowers Interest Rate," gulfnews.com, January 29, 2013. Lower interest rates would help India's economy by Attracting foreign investment can help India's economic growth because it
increasing investment and increasing exports. brings in foreign expertise and money to help India modernize its economy.
Source: Simon Johnson, "The Real Fiscal Risks in the United States," New York Times, December 6, 2012. Higher consumption and lower savings globally could negatively impact the U.S. because
the U.S. government is a perpetual deficit spender which relies partially on foreign savings to fund the deficits.
