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Wize University Macroeconomics Textbook > Open Economy Macroeconomics

International Flows of Goods and Services

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International Flows of Goods and Services

  • Closed economy - an economy that does not interact with other economies in the world.

  • Open economy - an economy that interacts freely with other economies around the world.

  • Net exports (trade balance) = Exports of Goods and services - Imports of Goods and Services

  • Net capital outflow (Net foreign investment) = the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreigners. Example: If Tesla opens a factory in China, that is an example of foreign direct investment. Alternatively, if an American buys stocks in a Chinese company, that is an example of foreign portfolio investment. Both are considered capital outflows for the USA.

Net Capital Outflow (NCO) = Net Exports (NX) \boxed{\text{Net Capital Outflow (NCO) = Net Exports (NX) }}
Example: If Bombardier, a Canadian company, sells some planes to a Japanese air­line it causes Canadian net exports to increase. Let's say Bombardier exchanges the yen it got for dol­lars with a Canadian investment firm that wants the yen to buy stocks in a Japanese company like Sony. In this case, Bombardier's net export of planes equals the investment firm's net capital outflow in Sony stock. So, NX and NCO rise by an equal amount.

Real GDP (Y) = C + I + G + NX \boxed{\text{Real GDP (Y) = C + I + G + NX }}


Y - C - G = I + NX \boxed{\text{Y - C - G = I + NX }}

Savings = I + NX \boxed{\text{Savings = I + NX }}


Savings = I + NCO \boxed{\text{Savings = I + NCO }}


  • When savings exceed domestic investment the net capital outflow must be
    positive
    and when the savings are less than domestic investment the net capital outflow must be
    negative







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Example: International Flows of Goods and Services


If the value of a nation's imports exceeds the value of its exports, which of the following is NOT true?

A) Net exports are negative
B) GDP is less than the sum of consumption, invest­ment, and government purchases
C) Domestic investment is greater than national saving
D) The nation is experiencing a net outflow of capital


D.
NX = NCO
If net exports are negative then this means net capital outflow is also negative, which means it is a capital inflow.

Practice: International Flows of Goods and Service


Comparing the North American economy today to that of 1950, what does one find to be true about exports and imports today as a percentage of GDP?

Practice: Net Capital Outflow


In an open economy, national saving equals domestic investment