International Capital Flows in an Open Economy

In an open economy, why does domestic savings no longer have to equal domestic investment?

Because of the possibility of international borrowing or lending

In an open economy how do residents interact with citizens of other countries?

Either in the world market for goods and services or in the world financial markets

What does the net capital outflow equal?

The purchase of foreign capital or financial assets by domestic residents minus the purchase of domestic assets by foreigners

Which company purchased the U.S. company Anheuser-Busch?

Inbev a Brazilian and Belgian owned brewing company

What was the result of Inbev purchasing Anheuser-Busch?

The purchase of a domestic asset by foreign residents

The purchase of Anheuser-Busch did what to the purchase of domestic assets by foreigners?

Added to it

The purchase of a domestic asset by foreign residents results in what effect on the net capital outflow?

A decrease

Why does net capital outflow decrease when domestic assets are purchased by foreign residents?

Since we subtract such purchases

When Intel builds a factory in Taiwan what does it result in?

The purchase of foreign assets by domestic residents

The purchase of foreign assets by domestic residents has what effect on net capital outflow?

It increases net capital outflow

What are the two types of international capital flows?

Foreign direct investment, and portfolio investment

What is foreign direct investment?

Situations in which a company or individual acquires assets in a foreign country that they will manage actively

What is an example of foreign direct investment?

The purchase of Rockefeller Center in New York by the Japanese corporation Mitsubishi in 1989

What is portfolio investment?

An individual or business purchases shares of stock or bonds issued by a foreign corporation

What is an example of a porfolio investment?

The Chinese government purchasing U.S. government bonds

In an open economy what two things are equal?

Net capital outflow (NCO) and Net exports (NX)

If electronics importers purchase a container full of video games from a Japanese manufacturer and pays $100,000 what does this purchase count as?

An import

If a electronics importers purchase video games from a japanese manufacturer for $100,000 what happens to net exports?

It reduces net exports by $100,000

What could the Japanese producer do with the money?

Put it in a safe

If the Japanese company puts its money in a safe what are they doing?

Using their income to invest in the U.S. economy

By putting their money in the safe how is the Japanese company investing in the U.S. economy?

By purchasing a domestic asset (U.S. currency)

What would occur as a result of the Japanese company storing their money in a safe?

Net capital outflows decrease by $100,000

More realistically what would the Japanese manufacturer likely do?

Purchase U.S. government bonds or take the money to the bank and exchange it for Yen

In the situation that the company exchanges the $100,000 for Yen why has the situation not really changed?

The bank faces the same choices as the company about what to do with the funds

Other than storing money or converting it, what might the company also do?

Purchase U.S. goods and services

In the case that the company spends the money to purchase U.S. produced goods or services and they spend their entire revenue what will happen to the U.S. exports of services?

It increases by $100,000 balancing earlier imports

For the economy as a whole the amount of net capital outflows must equal what?

Exactly the net exports

Since net exports equal net capital outflows what can we replace NX with?

NCO

By replacing NX with NCO what do we have?

S = I + NCO

What does S = I + NCO state?

Domestic saving equal domestic investment plus net capital outflows

In an open economy savings can differ from investment to what extent?

To the extent that the difference is offset by net capital outflows

If foreigners are willing to lend to domestic citizens what happens to NCO?

It becomes negative

When can investment be larger than savings?

When foreigners are willing to lend to domestic citizens

Why will the situation in which foreigners lend to domestic citizens likely be reversed at some point?

Foreigners make loans with the expectation that they will be repaid at some point in the future

When the situation is reversed what happens to savings?

They exceed investment to produce positive capital outflows