Please enable JavaScript.
Coggle requires JavaScript to display documents.
Topic 4: Open Economy Savings and Investment (Globalization (Benefits…
Topic 4: Open Economy Savings and Investment
In a closed economy: savings = investment
Balance of payments accounting
Current account: country's trade between countries
Net income from abroad
Net unilateral transfers
Net exports
Financial account (capital account)
Financial account balance = Financial inflows - financial outflows + net increase in foreign- owned derivatives
Official reserve assets (held by central bank): assets other than domestic money or securities, that can be used in making
international payments
Measurements of increases or decreases in international ownership of assets (i.e: copyrights, trademarks, ...)
CA + FA = 0
Net foreign assets
foreign assets - foreign liabilities
net increase in foreign assets = country's current account surplus
net decrease in foreign assets = country's current account deficit
current account surplus => financial account deficit
current account deficit => financial account surplus (a financial inflow)
Goods market
Small open economy
an economy too small to affect the world real interest rate
Shocks
Demand (i.e: MPK rise => investment curve will shift to the right)
Supply (i.e: temporary adverse supply shock) => AS curve will shift to the left => Saving curve will shift to the left (because of less output Y)
Two- country model
Large open economy
Current account surplus in one country = Current account deficit in other country
Changes in the equilibrium world real interest rate
: any factor that increases desired international lending of a country relative to desired international borrowing causes the world real interest rate to fall (
not sure but should we consider lending country in the supply side and borrowing country in the demand side
)
Globalization
more international trade and investment
exports + imports rise rapidly
International capital flows + foreign investments have increased
Benefits
able to access wider ranges of goods and services
circulation of ideas has become easier (spill over effect)
Costs
losses of job in some sectors (trade war)
Large CA deficit (US)
other countries want to invest in that country
international lenders => international borrowers
Fiscal policy