Chapter 18 Econ issues

If domestic residents of New Zealand purchase $60 million of foreign assets and foreigners purchase $50 million of New Zealand assets, then New Zealand's net capital outflow is -$10 million, so it must have a trade surplus. -$10 million, so it must have a trade deficit. $10 million, so it must have a trade deficit. $10 million, so it must have a trade surplus.

$10 million, so it must have a trade surplus.

Last year a country saved $120 billion during the year, had exports of $90 billion and imports of $60 billion. What was its domestic investment during the year? $150 billion $120 billion $90 billion $30 billion

$90 billion With exports of $90 billion and imports of $60 billion, the country's net exports were $30 billion, so it had net capital outflow of $30 billion. Since saving must equal investment plus net capital outflow, investment must equal saving minus net capital outflow. Since saving is $120 billion and net capital outflow is $30 billion, investment is $90 billion.

what to divide to to get exchange rate?

Always divide foreign by US dollars (Ex: francs/dollar) Foreign / US dollar

If Mexican exports are $50 billion and Mexican imports are $10 billion, which of the following is correct? Mexico has a trade surplus of $40 billion. Mexico has a trade surplus of $50 billion. Mexico has a trade deficit of $40 billion. Mexico has a trade deficit of $10 billion.

Mexico has a trade surplus of $40 billion. Since Mexican exports are greater than Mexican imports, it has a trade surplus. The value of this trade surplus is the difference between the value of exports and the value of imports: $40 billion.

What is net capital outflow?

Net capital outflow (NCO) is the net flow of funds being invested abroad by a country during a certain period of time (usually a year). A positive NCO means that the country invests outside more than the world invests in it and vice versa. NCO = Acquisition of foreign assets by residents - Acquisition of domestic assets by nonresidents NCO= Net exports

Relationship between savings, investment, and NCO

S = I +NCO And remember that NCO=NX.

A Swedish mutual fund buys stock issued by a Norwegian company. This purchase is an example of Norwegian foreign portfolio investment. It increases Norway's net capital outflow. Norwegian foreign portfolio investment. It decreases Norway's net capital outflow. Swedish foreign portfolio investment. It increases Norway's net capital outflow. Swedish foreign portfolio investment. It decreases Norway's net capital outflow.

Swedish foreign portfolio investment. It decreases Norway's net capital outflow.

Other things the same, if the exchange rate changes from 0.60 Swiss francs per dollar to 0.70 Swiss francs per dollar, the dollar has appreciated and therefore each dollar buys fewer Swiss goods. appreciated and therefore each dollar buys more Swiss goods. depreciated and therefore each dollar buys more Swiss goods. depreciated and therefore each dollar buys fewer Swiss goods.

appreciated and therefore each dollar buys more Swiss goods. The number of Swiss francs required to buy a U.S. dollar increases from 0.60 to 0.70. When the amount of foreign currency required to buy a U.S. dollar increases, the dollar is said to have appreciated. In other words, when the U.S. dollar buys more of a foreign currency, like the Swiss franc, the dollar is said to have appreciated. When the dollar appreciates against the Swiss franc, a U.S. dollar buys more Swiss goods.

If Canadian purchases of foreign assets are less than purchases of Canadian assets by foreigners, then Canada has a positive net capital outflow and negative net exports. positive net capital outflow and positive net exports. negative net capital outflow and positive net exports. negative net capital outflow and negative net exports.

negative net capital outflow and negative net exports.

Suppose that Thailand's saving exceeds its domestic investment. In this case, Thailand has positive net capital outflows and positive net exports. positive net capital outflows and negative net exports. negative net capital outflows and negative net exports. negative net capital outflows and positive net exports. Since S = I + NCO, when a country's saving exceeds its domestic investment (S>I), NCO has to be positive to equalize the difference. More intuitively, if the amount that a country saves each year is greater than the country's domestic investment, the remaining capital has to flow out of the country. Whenever a country's net capital outflow is positive, net exports have to be positive also.

positive net capital outflows and positive net exports. Since S = I + NCO, when a country's saving exceeds its domestic investment (S>I), NCO has to be positive to equalize the difference. More intuitively, if the amount that a country saves each year is greater than the country's domestic investment, the remaining capital has to flow out of the country. Whenever a country's net capital outflow is positive, net exports have to be positive also.

If the nominal exchange rate remains at 30 Thai bhat per U.S. dollar while prices in Thailand rise more slowly than in the United States, then the real exchange rate of Thai goods for U.S. goods rises does not change declines cannot be determined from the information

rises If purchasing-power parity held, the real exchange rate would remain constant at 1. However, purchasing-power parity implies that the nominal exchange rate changes with relative price levels between countries, so, since the nominal exchange rate remains at 30, purchasing-power parity does not hold in this situation. The real exchange rate is equal to (Nominal exchange rate x Price level in the United States)/Price level in Thailand. Since the price level in Thailand rises more slowly in Thailand than in the United States, the numerator of this equation rises more quickly than the denominator, causing the real exchange rate to rise.