L11 Open Economy Flashcards
What must happen to the definition of GDP by expenditure if we allow for international trade?
Should add NX to it, balancing item, comprises output that is NOT purchased domestically
NX = Y - (C + I + G)
DEF : current account BOP. What does it measure? What is it the sum of?
Measures net income flows from abroad received by domestic citizens or gvt over a given period
CA = NX + NIA + NT
Net exports
Net income from overseas assets
Net transfers
The idea is that it measures the country’s international transactions
DEF : net capital flows. What are they given by?
What does it mean for there to be a positive net capital flow?
Changes in net wealth STOCK of domestic citizens/government due to current deficit/surplus
Given by:
Change in foreign ownership domestic assets - change in domestic ownership of foreign assets
Funds are flowing into the economy; we would have less wealth stock in U.K. but inflow of capital
if Japanese company bought a plant in the U.K.
if we sold off loads of US government debt
Due to what do we have international investment flows?
- FDI
- Portfolio investment
- Official sector (CB) flows
What’s the fundamental international accounting identity?
The current account
And
Net capital flows
MUST BALANCE!
CA + NCF = 0
What would increased imports imply? Ie how do we pay for them?
- Offer a domestic asset
2. Sell down assets held abroad
What’s Bernanke’s view if you simplify the world and split it into two regions - US and rest of world?
NXus + NXrest = 0
S_rest- I_rest = -NX_us
So
HIGHER SAVINGS IN THE REST OF WORLD
-> higher US trade/CA deficit
Why would we have a global savings glut?
a. Demographics
b. Crisis insurance
c. CB interventions
d. Oil exporters and sovereign wealth funds (ACTIVE policy change)
Open economy in the long-run - What is a MAJOR assumption
We have perfect capital mobiliy
What happens if the domestic r deviates from r*?
Less? Unmanageable capital outflows
More? Unmanageable capital inflows
What are the implications of perfect capital mobility? Think of MPK, production function, A
Free flow of ideas, would expect A to be the same and capital to flow where (K/L) lowest (1)
What is Lucas’ paradox and how does he justify it?
That there’s an absence of investment inflows to low capital countries
- Human capital differences; embodiment of more ‘labour units’ via effective workers
- Technology differences, A varying. BUT why would that be the case? (Think! Ans in booklet)
- Capital market imperfections eg politics and monopolies
In the small open economy version of the Classical mod, what does higher government spending do to the real interest rate and net exports?
What does it imply for deficits? (Hypothesis)
No effect as it’s r* that matter
Crowds out net exports one-for-one
That higher budget deficits go together with CA deficits -> the TWIN DEFICITS Hypothesis
