Ch. 5 Econ

What is foreign direct investment? How does it allow country to borrow from foreigns?

A foreign business firm buys or build captial goods. This happens for example if Honda builds a plant in the U.S. The U.S foreign owned assets increases, and thus so do the capital and financial account balances.

How can the net foreign assets be changed in two ways? Why is this important to the nation's wealth? What does the net amount of new foreign assets that a country acquires equal to?

A nation's wealth includes net foreign assets. 1. Value of existing foreign assets and foreign liabiliteis can chen when stock held by a U.S citizen in a foreign coporation increase in value or when the value of U.S farmland owned by a foreigner declines 2. Country can acquire new foreign assets or incur new foreign liabilities. The new amount of foreign assets that a country acquires is equal to the current account surplus.

How do you get the current account balance? What does it mean if it is negative? What does it mean if it is positive?

Add all the credit items and subtract all the debit items. If it is positive that means we have a current account surplus (more money coming in) If it is negative, then we have a current account deficit (more money going out)

What is a Credit item?

Any transaction that involves a flow of funds into the U.S (+ sign)

What is a Debit Item?

Any transactions that involve a flow of funds out of the U.S ( - sign)

What is the official reserves assets? How can they be changed? What was the official reserve asset status in the U.S at 2008? What is the official settlements balance/balance of payments?

Assets held by the cnetral bank that are not domestic money or securities but can be used in making internaitonal payments. Quantity of assets are changed depending on how much a central bank buys or sells them in open markets. 2008 - U.S central bank bough 4.8 billion of offical reserve assets. Foreign central banks increased their holding of dollar-demoninated reserve assets by 421.4 billion. Net increase (domestic minus foreign) in country's official reserve assets. Balance of payments are at a surplus if it is higher.

Why are the following the same A current account surplus of 10 billion A capital and financial account deficit of 10 billion Net acquisition of foreign assets of 10 billion Net foreign lending of 10 billion Net exports of 10 bliion

Because if CA = 10 billion, KFA = -10 Net acquistition of foreign assets means money outflow and is the makeup of KFA Net foreign lending of 10 billion is the same as an inflow CA

What is a small open economy? What is a world real interest rate?

Economy that is too small to affect the world real interest rate. The world real interest rate is the real interest rate that previals in the international capital market.

What does net income from abroad equal? What are we going to ignore about NFP (net factor payments)? What constitutes as net income from abroad?

Equals income receipts from abroad minus income payments to residents of other countries. We are going to ignore any differences between net income from abroad and NFP and treat them the same since they numbers are pretty similar. Credit items to the current account: compensation from residents working abroad, investment income from assets abroad (interest payments, dividends, royalties, etc)

What are the components of a financial account? What is the financial account balance?

Financial inflow: home country sells an asset to another country. Money comes into the home country so the country is credited Financial Ouflow: home country buys an asset from abroad. Home country gives money away which means it is debited. The balance equals the value of financial flows minus value of financial outflows. When it sells more assets to foreigners than it buys from them, there is a financial account surplus

How do net exports give the U.S Credit (example)? What are net exports often broken down into?

If a U.S customer buys a Japanese Car, money flows outwards to Japan which makes it a debit ( - sign) for the U.S. For japan, it becomes inflo so it is a credit item ( + sign) Net exports of often broken down into goods and services

In goods market equilibrium a country's net exports equals gross domestic product minus absorption

In goods market equilibrium a country's net exports equals gross domestic product minus absorption

What is a capital account? What is the capital account balance?

Includes unilateral transfers of assets (debt forgiveness, migrants' transfers. The balance measure the net flow of assets unilaterally transfered into the country.

What was the U.S status of creditor and debitor in WWI till the 1980s. Why did it change? What is the problem with this?

It was a net creditor (it had more foreign assets than liabilities) and lended money. Today it is now a net debitor because foreign ownernship of U.S assets overtook U.S ownership of foreign assets. The deterioation of the U.S net foreign asset position doesnt appear to be accompanied by an increase in rate of physical investment or hman capital formation in the U.S

What happens when there is an increase in the expected future marginal product of capital in a small open economy? R IS CONSTANT?

MPK(f) raises capital stock that domestic firms desire to hold

What is Current Account? What 3 parts is it divided into?

Measure's a country's trade in currently produced goods and services, along with unilateral transfers betwen two countries. 1) Net Exports of goods and services 2) Net Income from Abroad 3) Net Unilateral transfers

What are Unilateral Transfers? What are example of it? What happens when the U.S makes a unilateral transfer?

Payments from one country to another that do not correspond to the purchase of any good, service, or asset. These include foreign aid, gift money. Funds transfer out of the U.S and thus it is a debit ( - )

What is desired net foreign lending?

S(d) - I(d)

What is the capital and finance account balance?

Sum of the capital account balance and the financial account balance

What is produced quarterly (two and half months after the end of a quarter) by the Bureau of Economic Analysis (BEA)?

The data on U.S intenrational transactions that make up the balance of payments

How does a small open economy achieve equilibrium when desired investment is greater than desired savings?

The part of investment not available is supplemented by foreign borrowing.

How does a small open economy achieve equilibrium when desired national savings exceeds desired investment?

The part of national savings not used for investment is lent abroad (when savings is more than investment due to high world real interest rate)

What is the relationship between the current account balance and the captial financial account? What is the statistical discrepnecy?

They must sum up to 0. CA + KFA = 0 Sometimes it might not be exactly 0.

How are a country's (CA) balance and foreign lending closely linked by domestic spending and production decisions? What is absobtion.

To start SAvings equals S = I + CA = I + (NX + NFP) So. Savings can be increased by 1) increasing nations stock of capital by funding investment 2) increase nations stock of net foreign assets by lending to foreigns. CA = amount of funds available for foreign lending. The more you foreign lend the more CA you have, which increases savings. Also S(d) = I(d) + CA CA = NX + NFP S(d) = in goods market equilibrium in an open economy, desired amount of national saving, must equal desired amount of domestic investment plus the money lent abroad Y = C(d) + I(d) + G + NX NX = Y - (C(d) + I(d) + G) --> states that in goods market equilibrium, net exports are output minus domestic consumption. The domestic spending/consumption is absorption

What happens when there is a temporary adverse supply shock in a small open economy? R IS CONSTANT

drought = decline in income decline in current income = decline in current savings. which means savings curve shifts left. Supply shock is temporary so expected future marignal mroduct of capital is unchanged. Which means desired investment is unchanged. Thus, it lowers current output and causes consumers to save lft. National savings decrease and current account surplus decreases. Means less money to lend

What is balance of payments acounts?

park of the national income accounts