International flows of k goods The capital current account Y=C+l+g+M Y-C-G--M=O S-I-=O (I-S)+NX=0
6 International Flows of K & Goods ◼ The capital & current account Y =C+ I +G+NX Y −C−G− I −NX = 0 S − I −NX = 0 (I − S) + NX = 0
International flows of k Goods (I-S)+NX=0 (I-S): capital account NX: current account (S-1): net foreign investment(NFI)
7 International Flows of K & Goods (I-S): capital account NX: current account (S-I): net foreign investment (NFI) (I − S) + NX = 0
International flows of k Goods Net Foreign Investment(NFI) what we lend to foreigners -what we borrow from foreigners(net capital outflows) net capital outflows=NFI= NX= trade balance NFI=-capital account ■S>, net lender ■S<, net borrower
8 International Flows of K & Goods ◼ Net Foreign Investment (NFI) what we lend to foreigners – what we borrow from foreigners (net capital outflows) net capital outflows=NFI = NX= trade balance NFI = -capital account ◼ S>I, net lender ◼ S<I, net borrower
International flows of k goods a Capital and current account balance NX>O current account (trade) surplus →NF|=(S-)>0( ender) >Capital account deficit
9 International Flows of K & Goods ◼ Capital and current account balance NX > 0 current account (trade) surplus →NFI = (S-I) > 0 (lender) →Capital account deficit
Small Open Economy ■ Closed economy: )Output must equal consumption 2) Savings must equal investment ■ Open economy Access to world financial markets Interest rates do not need to clear the domestic financial market 10
10 Small Open Economy ◼ Closed economy: 1) Output must equal consumption 2) Savings must equal investment. ◼ Open economy: → Access to world financial markets → Interest rates do not need to clear the domestic financial market