ECON 224 Final

When NCO > 0

Domestic purchases of foreign assets exceed foreign purchases of domestic assets.

Foreign Direct Investment

Domestic residents actively manage the foreign investment, e.g., McDonalds opens a fast-food outlet in Moscow.

Foreign Portfolio Investment

Domestic residents purchase foreign stocks or bonds, supplying "loanable funds" to a foreign firm.

When NCO < 0

Foreign purchases of domestic assets exceed domestic purchases of foreign assets

S=

I (Domestic Investment) + NCO

Demand of Loanable Funds =

I + NCO

When a foreigner purchases a good from the U.S.,

NCO (NX) and US exports increase

e=

P*/P (foreign/domestic)

Supply of Loanable Funds=

Savings

Public Saving

Tax revenue less government spending

What could necessarily increase the equilibrium interest rate?

The demand for loanable funds shifts right and the supply of loanable funds shifts left.

Crowding Out

The govt borrows to finance its deficit, leaving less funds available for investment

Private Saving

The portion of households' income that is not used for consumption or paying taxes

When a U.S. citizen buys foreign goods

US imports rise and NCO (NX) falls

Bond

a certificate of indebtedness.

Capital Flight

a large and sudden reduction in the demand for assets located in a country

Import Quota

a limit on the quantity of imports

Budget Defecit

a shortfall of tax revenue from govt spending

Tariff

a tax on imports

Purchasing Power Parity (PPP)

a theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries

trade surplus

an excess of exports over imports

Trade defecit

an excess of imports over exports

Budget Surplus

an excess of tax revenue over govt spending

As real interest rates fall, firms desire to

buy more new equipment and buildings. This response helps explain why the demand for loanable funds is downward sloping.

A closed economy

does not interact with other economies in the world.

the policy of restricting imports...

does not reduce the trade deficit.

A closed economy

does not trade with other economies.

Net Capital Flow (NCO)

domestic residents' purchases of foreign assets minus foreigners' purchases of domestic assets

Exports

domestically-produced g&s sold abroad

If inflation is higher in the U.S. than in Japan

e falls and the dollar depreciates against the yen.

If inflation is higher in Mexico than in the U.S

e rises and the dollar appreciates against the peso

An increase in real interest rates in the United States

encourages both U.S. and foreign residents to buy U.S. assets.

A country's trade balance is greater than zero only if...

exports are greater than imports.

Imports

foreign-produced g&s sold domestically

Mutual funds

institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

Financial Markets

institutions through which savers can directly provide funds to borrowers.

Financial intermediaries

institutions through which savers can indirectly provide funds to borrowers

An open economy

interacts freely with other economies around the world.

In economics,

investment is NOT the purchase of stocks and bonds

national saving equals

investment, income minus the sum of consumption and government purchases, and private saving plus public saving.

Stock

is a claim to partial ownership in a firm.

The primary economic function of the financial system is to

match one person's saving with another person's investment.

A country has a trade deficit if

net capital outflow must be negative and saving is smaller than investment.

If the real exchange rate is less than 1, then the

nominal exchange rate x U.S. price < foreign price. The dollars required to purchase a good in the U.S. would not buy enough foreign currency to buy the same good overseas.

If Norway sold more goods and services abroad than it purchased from abroad, then it had

positive net exports which is a trade surplus.

Investment

purchase of new capital

larger budget deficit

raises the interest rate and reduces investment.

an increase in the foreign price level

reduces the real exchange rate. This reduction could be offset by an increase in the domestic price level.

A higher interest rate induces people to

save more, so the supply of loanable funds slopes upward.

In a closed economy,

saving=investment

NX is

the demand for dollars

The dollar is said to appreciate against the euro if

the exchange rate rises. Other things the same, it will cost more euros to buy U.S. goods.

financial system

the group of institutions that helps match the saving of one person with the investment of another.

Law of One Price

the notion that a good should sell for the same price in all markets

National Saving

the portion of national income that is not used for consumption or government purchases (public + private)

Nominal Exchange Rate

the rate at which one country's currency trades for another

Real Exchange Rate

the rate at which the g&s of one country trade for the g&s of another (exchange rate x domestic/foreign)

NCO is

the supply of dollars

A policy that induces people to save more shifts

the supply of loanable funds and reduces interest rates.

Net exports=trade balance

value of exports - value of imports