Macrotheory Final Exam

Savings Rate Changes in the Solow Model

- suppose that s increases: --starting from steady state, now investment > depreciation --capital goes up, and so does consumption, output --the levels change to the new steady state

what is an economic model and how do you make one

- An economic model is a simplified representation that takes a mathematical or graphical form - Development of an economic model 1. Identify an interesting question 2. Specify the variables to be explained by the model as well as the variables that will explain them. An endogenous variable is a variable that we want to explain while a exogenous variable is a variable that are used to explain endogenous variables, but are taken as given and thus are viewed as determined outside the model 3. Posit a set of equations or graphical analysis to connect movements in the exogenous variables to the endogenous variables 4. Compare the conclusions of the model with what actually happens. 5. If the data are well explained, use the model to make further predictions.

central banks and monetary policy

- Central banks including the US Federal Reserve are tasked with overseeing the banking systems and have the job of keeping inflation in check. Central banks also conduct monetary policy which is the management of the amount of money in the economy and interest rates. Given the challenges of fighting inflation, central bankers spend a great deal of time investing monetary policy frameworks to control price levels.

what is macroeconomics

- Macroeconomics is the study of economic activity and price in the overall economy of a nation or a region. Macroeconomists try to explain how an overall economy works using an economic theory which is a logical framework to explain a particular economic phenomenon.

stabilization policy

- Stabilization policy - goal is to minimize business cycle fluctuations and stabilize economic activity - is a goal for macroeconomic policy. ○ The activists advocate for the use of policies to eliminate excessive unemployment whenever it develops whereas the non-activists argue that the economy has a self-correcting mechanism that will quicly restore an economy in recession to a healthy state. Activists policies would just create more fluctuation. --Another issue is whether policymakers should conduct policy in a discretionary manner or with rules. Rule-determined policy can avoid bad outcomes by making sure that policy accounts for approprite ong-run considerations; however, rules can put policymakers in a strightjackets.

real versus nominal interest rates

- a nominal interest rate makes no allowance for inflation - the real interest rate is the amount of extra purchasing power a lender must be paid for the rental of his/her money --- the ex ante real interest rate is adjusted for expected changes in the price level ---the ex post real interest rate is adjusted for actual changes in the price level

interest rates

- an interest rate is the cost of borrowing, or the price paid for the rental of funds - interest rates are returns for holding debt securities such as sbonds

large economies and the rest of the world

- arguably the US (or Europe) has impact on its own interest rate - most of our insights will carry through to a large economy analysis --interest rates will move when saving in the US moves --so all effects will be somewhat muted --how much, depends on the rest of the world's response -what changes? --now we have two economies, both have I and S curves just like we derived --now market clearing is NX1 = - NX2 - everything true about a small open economy is true about a large economy true - you will essentially have two large economies: the world market needs to be clearing some market (the capital market) as it needs to net out to zero.

autonomous consumption and investment

- autonomous consumption changes moves the whole saving curve -- consumer outlook or sentiment --expectation of future changes in government policies - autonomous investment changes moves the whole investment curve --business sentiment --changes in tax policies

Supply Shocks

- changes in A: supply shocks - a supply shock is a change is the output an economy an produce from the same amount of capital and labor --- positive (favorable) supply shocks shift the production function up ---negative(adverse) supply shocks shift the production function down

the rest of the world and the small open economy

- changes in world saving determine the world interest rate --rest of world autonomous consumption expenditure --rest of world taxes, government spending - leads to inflows or outflows of capital in the small open economy

Firm's Maximization: Solution

- first, plug in the production function mac(k,l) AK^alphaL(1 - alpha) - rK - wL How to choose optimal level of capital? Maximize profit with respect to k, treating L as fixed How to choose optimal level of labor? Maximize profit with respect to L, treating K as fixed

government policies to stimulate saving

- given what we have said so far, governments may want to stimulate saving. Some policies: -- tax consumption: tax paid by a producer on the difference between what it receives from the sales minus the costs. -- tax incentives (IRA) -- increase return on saving (like capital gains taxes) -- reduce budget deficits

firm behavior

- how should we model behavior of firms? Some typical assumptions that we make are ---- firms maximize profits ----individuals maximize utility some things to keep in mind : ---- firms are owned by some individuals (shareholders, owners) ---- managers are hired by shareholders ----employees are hired by managers ----etc.

replication argument

- if you build two identical factories you would expect to get twice the output - some counter arguments: --second factory may be lower quality because it uses lower quality labor -- externalities: spill-overs across factories (positive or negative) -- omitted inputs

Distribution of Income

- labor demand says A(1 - alpha) K ^alpha L ^ - alpha = w manipulating gets alpha (y/l) = W multiplying by L to get total wage bill wL is (1 - alpha)Y = wL total payments to capital risk alpha(Y) = rK

why are some countries rich while others are poor

- output per capita y = Y/L = AK^n differences across countries due to - capital per worker k - productivity A -data: most due to differences in productivity

Equilibrium

- remember: we need K,L,w,r,Y ( 5 endogenous variables) --need same number of equations - supply of capital and labor at fixed values: K = K bar; L = L bar - MPK = r demand for capital - MPL = w demand for labor - Y = F(K,L) output equation - these five equations and five unknowns are the equilibrium of out economic model - can say something about the solution by looking at some of the conditions

convergence in the solow model

- the solow model predicts that similar economies will experience convergence --why similar: need to have common s and technology (cobb-douglas) capital share, and A, population growth - countries with low initial levels of capital and output per worker grow rapidly as kt and yt to reach their steady state values - countries with high initial level of capital and output per worker: grow slowly as kt and yt fall until they reach their steady state values -there is strong evidence of convergence among wealthy nations. The realtionship breaks down however when we extend the analysis to a arger gorup. Rich and poor countires dont follow the model which may be due to differences in productivity.

how has the US become the largest net debtor in the world?

- until the 1980s, the US was the largest net creditor in the world - by 2012, net foreign debt was over 3.9 trillion dollars or 255 of GDP - how did the US go from being the largest net creditor in the world to the largest net debtor? - the net capital outflow provides the answer (S - I = NX). For the US, S and I moved closely together until the 1980s - then S dropped and disconnected from I leading to trade deficits. As a result NFA starts declining

link between saving and wealth

- uses of saving and net capital outflow identities --show how saving is linked to wealth --saving can either finance investment or net exports - net foreign assets (NFA) is the US holdings of foreign assets - foreign holdings of US assets --capital outflows increase NFA --trade balance tells us what happens to NFA - US has a very low private savings rates in recent years. Does it mean that personal wealth has not increased in the United States? No. The key is the valuation of the assets. NFA is the sum of a sequence of trade balances over the last 50 years. The US usually invest in high risk things like capital and venture projects while foreigners usually invest in debt You need to be aware of the factor payment flows from the assets position.

Twin Deficits

- we saw that the drop in savings can be because of rise in G: budget deficit - we get double deficits: budget and trade - an example is in 1979 to 1983 when US government saving declined sharply because the budget deficit for the combined government (federal, state and local) went from under 2% of GDP to nearly 6% of gdp - the US economy began to display a large trade deficit - the saving-income analysis explains why - trade and budget deficits typically go hand in handn

Firm's Maximization

-chose how much capital and how many workers to hire, to maximize profits P x F (K, L) -RK - WL - P is the average price level - R is the rental rate of capita - W is the wage rate - divide by P to make it real - chose how much capital and how many workers to hire, to maximize profits F(K,L) - rK - wL ---- r is the real rental rate of capita ----w is the real wage rate - the firm take wage and rental rate as given ---competitive markets for labor and capital ---what are the arguments behind that

diminishing marginal products

-diminishing marginal products give downward sloping demand curves --if the price of labor rises, need to increase MPL as well ---to do that, need to decrease labor (because of diminishing returns) ---same argument for capital - gives downward sloping demand curves for capital and labor - supply: for now let us assume fixed: K = K bar L = L bar

Endogenous vs exogenous variables

-endogenous are variables to be explained by the model (bankruptcy rate)(come out of the model) -exogenous are the variables that explain the model (catastrophic events medical cost) (go into the model)

Fiscal Policy vs monetary policy

-fiscal policy deals with government spending and taxation-- government budget deficit is the excess of government spending over tax revenues for a particular year -monetary policy: is the management of the money supply and interest rates--conducted by central banks eg the federal reserve of the US

government saving

-government purchases is G = CG + IG - government investment is IG - government consumption is CG - government saving is SG = T - CG (for simplicity SG = T - G) - budget surplus occurs if T > G and budget deficit (dissaving) occurs if T < G

inflation

-inflation rate: tells us how quickly the overall level of prices is rising - the rate of change of overall price level

Real Gross Domestic Product (GDP)

-measures the output of actual goods and services produced in an economy - over a fixed period, usually a year - real means it is relative to the cost of a typical consumption basket - also a measure of overall income

Cobb Douglas Production Function

-most commonly used production function is the cobb-douglas production function Y = F(K,L) = A K^alpha L^(1 - alpha) (where a describes productivity (total factor productivity) - more generally weights on K and L can be more flexible but we will usually have them sum to one - when alpha sums to one there are constant returns to scale (doubling inputs exactly doubles output) - need (exponents to sum to one) --- if they sum to something larger than there are increasing returns to scale (better to have a bigger factory) --- if they sum to something smaller than there are decreasing returns to scale (better to have two smaller factories)

objects versus ideas

-objects: are things that are physical inputs (ie capital, land or labro) or more generally they are goods and services -ideas are things like making plastic out of petroleum or computer chips out of sand. Could also be things like efficient inventory management or efficient queue management at a store. Objects are like the materials where ideas are the recipes that use the materials and transform them into somethign else.

Production of knowledge

-one way knowledge is produced is through innovation (r&d as well as business start ups (testing new ideas)) - governments can spending on R&D, offer tax incentives for R&D, or grant pattents to encourage R&D. Patents give investors the sole right to use, make, sell or license rights to others for a set period of time

unemployment rate

-percentage of workers who are both looking for work and who do not have jobs at a particular point in time - the unemployment rate is the percentage of people in the civilian population who want to work but who do not have jobs - the bureau of labor statistics classifies each adult over age 16 into: 1. employed 2. unemployed 3. not in the labor force -- those who would like to work but have given up looking --those who have voluntarily left the labor force

The Most Important Interest Rates

-prime rate - federal funds rate - London Inter-Bank Offered Rate (LIBOR) - treasury bill rate - ten-year treasury bond rate - federal home loan mortgage corporation rate

Productivity Growth in the Solow Model

-so farthe model predicts always convergence to steady state. In the steady state, no changes possible any more - need to consider gorwth in productivity (A). --upwards shift in the production function (direct effect) --increaes investment (additional effect) i_t = sAk_t^alpha

Growth Accounting in the Solow Model

-the model allows us to decompose the sources of growth (growth accounting) -the aggregate production function Y = Ak^(alpha)L^(1-alpha) growth rates are then g_y= g_a + alphag_k + (1-alpha)g_l where they are all the change in x / x. TFP at time t also known as the solow residual can be calculated as A_t = Y_t/(K_t^alpha * L_t^(1-alpha)

Model of Production

-the production function Y = F(K, L) Y - output L - number of workers (or hours of work) K - number of machines (amount of capital) - factors of production: labor and capital

Rise in productivity (solow model)

1) a rise in productivity increases the investment function 2) raising the capital-labor ratio Over time the rise in productivity leads to an immediate upwards jump in output per worker and capital and output per worker rise until capital per worker reaches its teady state level where both capital and output per worker stop rising

types of supply suock

1) technology shocks 2) natural environment shocks 3) energy shocks

Developing Macroeconomic Models

1. Identify and interesting economic question 2. specify the variables to be explained by the model (endogenous variables) and the variables that explain them (exogenous variables) 3. build model: a set of equations or graphical analysis that connect movements in the exogenous variables to the endogenous variables 4. test model: compare the conclusions of the model with what actually happens. If model fails, go back to steps 2-3 5. use the model to make further

recession

A recession is when economic activity declines and real GDP per person falls

Choosing Labor

A(1 - alpha) K^alpha L (- alpha) = 0 (or can set it equal to q) - equates the wage rate w to the marginal product of labor (MPL) - you should keep increasing labor as long as its contributing to output (MPL) exceeds the cost

Choosing Capital

A(alpha)K^(alpha - 1)L^(1 - alpha) - r = 0 (or can set it equal to r) - equates the renal rate r to the marginal product of capital (MPK) - condition says you should keepy increasing capital as long as its contribution to output (MPK) exceeds the cost

Capital Accumulation Equation

Change in capital stock per worker = investment per worker - depreciation per worker Substituting in for investment from the investment function, the capital accumulation equation becomes change in capital = sAk^alpha - sigma k This equation describes the change in capital from today to tomorrow depending on today's capital

Employment Ratio Calculation

Employed / Adult Population

fiscal policy

Fiscal Policy (policymaker's decisions to raise taxes, cut government spending, or both)

business cycles

Fluctuations in GDP are called business cycles which represents recurrent up and down movements in economic activity that differ in how regular they are.

government budget deficits

Government Budget Deficits is an excess of government spending relative to revenue, widened to over 10% of GDP over the 2007 - 2009 crisis.

importance of savings rates

Higher savings rates translate into higher investment, which boosts economic growth and the long-run level of real GDP. Households will save more if the amount they earn on their savings is high. Tax poicy is one way to increase the returns to savings(ie . Government can lower income taxes for households that put money into savings vehicles such as 401ks or governments can make consumption more costly through national sales taxes or give tax breaks to businesses that contribute to employee pensions.

Labor Productivity

How much output per worker is produced Y / L real wages and labor productivity (Y/L) should grow at about the same rate over time

National Income and Product Accounts

In the great depression the measurement of economic activity was not fully developed (some used industry level shipments, others agricultural production, others stock prices). - no unified way to measure the aggregate response of the economy. In this case it is difficult to decide if policy is working -NIPA was invented in the 1930s by Simon Kuznets with later work from Richard Stone. - it is produced in the US by the Bureau of Economic Ananlysis - it is a comprehensize measurement of aggregate economic activity

inflation

Inflation or the inflation rate tells us how rapidly the overall level of prices is rising. Deflation is when the inflation rate is below zero. A changing price level complicates decision making for consumers, businesses, and government and this uncertainty can hamper economic growth. Hyperinflation is super high inflation rates (this Zimbabwe)

Labor-Force Participation Rate Calculation

Labor Force / Adult Population

Marginal Product of Capital

MPK: extra output when 1 more unit of capital is added, holding L fixed - production function when we fix L F(K,L) = AK^alphaL(1-alpha) = constant x K ^alpha MPK is the slope of this function and thus equal to constant x alpha x K ^(alpha - 1) - marginal product is falling since alpha - 1 < 0 -cobb-douglas production function exhibits diminishing marginal product of capital

Solow Growth Model: closed economy with zero government spending

NX = 0 G = 0 S =I so saving determines investment. The total demand for output is: yt = ct + it Assuming: the saving rate(s) is a fixed fraction of income so that saving is yt - ct = syt. Output demand equation means it = yt + ct so that it = syt Substituting the per worker function production function the investment function is tt = sAkt^alpha This related per-capital investment to per-capita capital stock

Labor Force Calculation

Number of Employed + Number of Unemployed

Unemployment Rate Calculation

Number of Unemployed / Labor Force

Patents

Patents give investors the sole right to use, make, sell or license rights to others for a set period of time. -ofen investors over charge when they have a patent as they are the only one who can produce so they can charge whatever they want to recoup the research costs and make profit. If the patent just immediately enters the public domain then the price immediately goes down but the producer cant recoup costs so they wont invest in research and developement going forward. -property rights: without property rights the investors does not have the sole right to the invention and are thus unable to caputre the full benefits which leads to too little R&D. The solution to this is to make excludable.

Real GDP

Real GDP (Gross Domestic Product) measures the output of actual goods and services produced in an economy over a fixed period (usually a year) It also equals the total amount of real income of every person and firm in the economy

The Solow Model

Robert Solow developed the exogenous growth model called the solow model. The solow model links saving rats and population growth to capital accumulation and economic growth. He received a Nobel prize in 1987. For a given level of labor (L) the solow model can be expressed in per-worked terms. output = yt / lT ct = ct /Lt etc for investment and capital worker (or capital -labor ratio) The production function per-worker form: yt = Yt/Lt = Ak^alpha . This function assumes that A is exogenous (given parameter) - these is nothing to say about why technology changes over time

private savings equation

Sp = YD - C = Y - T - C

financial crisis

Starting in 2007, the US and many world economies experiences a financial crisis which is a large scale disruption in financial markets characterized by sharp declines in the prices of assets - property that includes bonds, stocks, art, land, etc) and business failures. Financial crisis are always accompanied by sharp economic downturns as we saw in the Great Recession.

Population Growth in the Solow Model

Suppose population growth is n - labor force increases at that rate -growth in labor force leads to less capital per worker -capital dilution (nk_t) occurs in the capital-accumulation equation change in k_t = sAk_t^alpha - sigmak_t - nk_t New 'depreciation rate' that accounts for population growth. - Capital has to grow to keep up with population to keep K/L the same - steady state level of capital drops: output, consumption as well - in the steady state capital per worker does not change so output, capital, consumption grows at rate n

Saving Rate Changes in the Solow Model

Suppose s increases: -starting from steady state, now investment > depreciation - the levels change to the new steady state Assuming that the ratio of workers to the population is similar across countries - high national saving rate should mean high per capital income -relationship holds roughly in the data

BLS Surveys

The bureau of labor statistics reports employment and unemployment data using two alternative surveys: the household survey and the survey of business establishments - the two surveys sometimes give a different picture of labor market conditions due to: -- the household survey counts workers, while the establishment survey counts jobs -- the household survey counts the self-employed as working while the establishment does not - the establishemnt survey counts more workers

Equilibrium in a small open economy

The difference between savings and investment is the trade surplus and is equal to NX1. The trade deficit is equal to net capital income and is the difference between savings and investment (below equilibrium) and is equal to NX2.

Equilibrium in the Goods Market

The equilibrium is where the savings curve and the investment curve meet. It is where savings is equal to investment When savings is greater than investment the interest rates fall whereas when investment is less than savings the interest rates rise.

Per-worker production

The slope of the per-worker production function falls as the capital-labor ratio rises.

Population Growth and real gdp per capita in the solow model

The solow model predicts that higher population growth makes the average person in a country poor. This does seem to hold in international data.

Dynamics of the Solow Model

The steady state level of capital per worker: k* in the solow diagram. - if an economy's initial capital-labor ratio is at k1 then change in kt > 0 so that kt rises over time until kt = k* - if an economy's initial capital-labor ratio is at k2 then change in kt < so that kt falls over time until kt = k*

Solow Model Steady State

The steady state of the economy is when investment = depreciation or when sAk^alpha = sigmaK So when change in k is equal to 0. The economy will converge to the steady state values of y,c, i if it initially starts away from the steady state.

unemployment rate

The unemployment rate measures the percentage of worker looking for work, but who do not have jobs at a particular point in time. Even in good times there will always be some level of unemployment

Optimal Svings Rate

This is the golden rule. You want to stop investing when the cost of maintaining the extra unit of capital/worker (depreciation + population growth) exceeds the extra output produced by the additional unit of capital - the golden rule level occurs where the investment curve intersects the depreciation line plus capital dilution.

US Growth in the postwar period

US economy grew at a 4% growth rate until 1973 and then slowed considerably to 2.9% until 1995. This slowdown can be explained by capital growth decline from 1.2% to 1%. Labor growth decline from 1.1% to 1% but mostly due to the productivity growth decline from 1.5% to 0.9%

Can a country influence its own borrowing rate

We will also have the international investment market which will respond to our interest rate in some way. Can a country influence its own borrowing rate? For the us yes because it is huge but for smaller countries in terms of economic activity the answer is no as they are price takers.

depression

When the decline in real GDP is severe, a recession is classified as a depression.

What makes ideas special

Where goods are rivalrous - ie one person's use of it limits the availability to others (things like computers, office space, land, hair-dressers). They are scarce resources; ideas are non-rivalrous meaning that me using an idea does not preclude other people from using it. We use algebra in class but that does not limit its avaiability for other classes. It is the same thing with inventory management. Ideas also have low excludability meaning that it is hard to prevent others from using your idea.

business cycles

are recurrent increases and drops in economic activity --differ in how regular they are (frequency) --differ in the length and severity of downturns (recessions)

Solow Growth Model and Capital Stock

capital stock is determined by past investment and depreciation (loss of capital from wear and tear). Assume that depreciation is at a constant rate sigma and that fraction of sigma of capital depreciation every period.

Marginal Product of Labor

extra output when 1 more unit of labor is added, holding K fixed - production function, when we fix K -MPL is the slope of this fucntion = constant x (1 - alpha) x L ^ (- alpha) - marginal product is falling since - alpha < 0 - cobb douglas production function exhibits diminishing marginal product of labor

the fisher equation

i = nominal interest rate r = real interest rate pi (e) = expected inflation i = r + pi(e) r = i - pi(e)

Per Capita Income

is we assume that every citizen works so that per capita income is the same as average income (output) per worker Y/L. Per capita income is then Y/L = AK^n where k is the capital per worker

net taxes

net taxes are taxes - government transfers - interest payments on debts

Excludable Patents

nobody can use the invention without inventing it from scratch. This is very inefficient to pay again for the same process.

recession

occurs when economic activity declines and real GDP per person falls

depression

occurs when the decline in real gdp IS SEVERE

national saving

private saving + government saving S = SG + SP = T -G + Y - C - T OR S = Y -C - G - national savings rate is S/Y

private saving

private saving: private disposable income - consumption expenditure - private disposable income is YD = Y - T (where Y is GDP and T is net taxes) Government transfers are things like unemployment or social services... things along these lines. Disposable income is income minus taxes plus government transfers US population has a lot of US debt (most 401k are heavily invested in the government and hold government debt). Private savings is disposable income minus consumption.

what determines GDP of a country in the long run?

sources of growth: growth accounting. Countries' experiences vary greatly. Some countries catch up - convergence. Some countries take off like rockets - growth miracles. Some countries stagnate - growth disasters. We will use a workhorse model to study and measure these phenomena: the Solow model - the importance of saving, population growth, and productivity growth

solow increase in the saving rate

step 1) an icrease in the saving rate raises the investment function step 2) raising capital per worker to a steady-state level

rise in vestment in a small open economy

step 1) an increase in investment step 2) decreases the size of the trade surplus and net capital outflows

Population Growth Acceleration in the Solow Model

step 1) an increase in the population growth shifts the deprication and capital dilution line upward step 2) decreasing the capital-labor ratio Over time the increase in population growth causes capital and output per worker to fall until capital per worker reaches its steady state level where both capital and output per worker stop falling

crowding out effect

step 1) there is a decline in savings step 2) this raises the interest rate step 3) and this decreases the desired saving and investment

macroeconomics

study of economic activity and prices in the overall economy at a national level or a regional level - macroeconomic research draws heavily on microeconomics (the behavior of individual firms, households, or markets) - going from micro to macro is called aggregation - macroeconomists explain how the overall economy works by using economic theory (logical framework to explain a partiuclar economic phenomenon)

effects of fiscal policy

taxes shift consumption and hence saving because they move Y - T in S = Y(bar) - C(bar) -C(Y(bar) - T(bar), r) - G(bar)) - we have that taxes raise savings and investment - for government purchases, if G(bar) goes up, then S goes down and hence, goes down and r goes up --this is called crowding out: government spending crowds out investment --there is a big debate over the 2009 stimulus ($787 billion) We have the equilibrium but we can ask what happens when we change fiscal policy which appears in this equation through taxes and government spending. One observation is that increased taxes increase savings as this lowers disposable income of individuals so that they consumer less and they will also save less but the reduction in consumption is greater. This is also when you don't changed government spending Government purchases without changing taxes. If you increase spending then G will directly change the savings level downwards is the initial impact but the secondary effect is that shifting the savings curve down will increase real interest rate and reduce investment so the government crowds out the market by decreasing private investment.

national wealth

the country;s holdings of assets minus its liabilities. -- physical assets (land,structure) portfolio assets, minus debt - as opposed to GDP or GNP - wealth is like a claim on future income from the assets - crucial for wealth accumulation are savings rates - in the aggregate, saving will contribute to future GDP --adds to wealth which is the value of all capital goods and capital-like goods -saving depending on who does it: private or government GDP and GNP are flows of wealth and are like a future claim Bigger inequality and wealth distributions means that future income flows will also become more equal Savings rates and also savings return rates will also be important. Savings will contribute to future GDP so we link it to investment in capital goods (could be things like houses or just investment goods). Everything in an investment portfolio is linked to something real. If you have a stock then you have an ownership share of a company. All investment links you to something real or physical.

Rise in savings in a small open economy

the saving curve shifts right which moves the interest rate down and increases the trade surplus and net capital outflows

technology

the solow model points to technology as a driver of long-run growth. According to the data, it is key.

uses of saving

uses of saving identity S = T + NX in the aggregate, a country that saves invests and sells goods to foreigners in exchange for assets (for example, currency) net capital outflow identity: S - I = NX Where S-I is the net capital outflow or net foreign investment - If S > I then the country is a net investor and we have net capital outflow so the country is a saver - if S < I the country is a net borrower and we have net capital inflows - NX is the trade balence (US has repeated trade deficits_) Starting in the 1980s the savings rate in the US dropped while investment was the same and this is why we now have a defincit in the US as this pattern has continued

personal wealth

wealth (or net worth) is the amount of holding of assets (stocks, houses) minus her liabilities (mortgages, loans) as opposed to income (flow) - negative net worth is like selling the rights toy your future income (a typical example a college student who finances via student loans) - positive net worth gives right to future income from your holdings (home ownership: remember, imputed services flow is in GDP)