Open-Economy Macroeconomics: Saving, Investment, Capital Flows, and Exchange Rates

Vocabulary practice flashcards covering open-economy macroeconomics, national savings, net capital outflow, loanable funds, and exchange rate determinations.

Private Saving

The portion of household income remaining after paying for consumption and taxes, calculated as $\text{Private Saving} = Y - C - T$.

Public Saving

The tax revenue that the government retains after paying for government spending, calculated as $\text{Public Saving} = T - G$.

National Saving

The total income in the economy that remains after paying for consumption and government purchases, equal to private saving plus public saving ($\text{National Saving} = Y - C - G$).

Net Exports ($NX$)

The value of a nation's exports of goods and services minus the value of its imports of goods and services ($\text{Exports} - \text{Imports}$).

Net Capital Outflow ($NCO$)

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreign residents (also known as net foreign investment).

$NCO = NX$ Identity

An accounting identity in an open economy stating that net capital outflow always equals net exports, because every international exchange of goods and services is balanced by an international flow of assets.

Market for Loanable Funds (Open Economy)

The financial market where saving is coordinated with investment; the supply comes from national saving ($S = Y - C - G$) and demand comes from domestic investment plus net capital outflow ($I + NCO$).

Market for Foreign-Currency Exchange

The market where domestic currency is traded for foreign currency; supply of domestic currency is determined by Net Capital Outflow ($NCO$) and demand is determined by Net Exports ($NX$).

Open-Economy Macroeconomic Model

An economic framework consisting of two markets (Loanable Funds Market and Market for Foreign-Currency Exchange) linked by one interaction mechanism (the real interest rate's effect on $NCO$).

Real Exchange Rate

The rate at which the goods and services of one nation exchange for those of another, calculated as $\text{Real Exchange Rate} = \frac{\text{Nominal Exchange Rate} \times \text{Domestic Price}}{\text{Foreign Price}}$.

Nominal Exchange Rate

The rate at which an individual or business can trade the currency of one nation for the currency of another nation.

Capital Flight

A large and sudden movement of funds out of a country caused by political or economic instability, which sharply increases net capital outflow ($NCO$) and depreciates the domestic currency.

Budget Deficit

A situation where government spending exceeds tax revenue ($G > T$), representing negative public saving that reduces national saving and shifts loanable funds supply to the left.

Budget Surplus

A situation where tax revenues exceed government expenditures ($T > G$), representing positive public saving that adds to national saving and expands loanable funds supply.