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PART II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

PART II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

B.

Domestic Savings and Investment

and the Capital Account

1. National Income Accounting

a.

National Income (NI) is either spent (C)

or saved (S)

NI = C + S (5.1)



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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

b.



National spending (NS) is

divided into personal

spending (C) and

investment (I)

NS = C + I



(5.2)

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

c.



Subtracting (4.2) - (4.1)

NI - NS = S - I



(5.3)



If NI >NS, S > I which implies

that surplus capital spent

overseas.

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

d. In a freely-floating system,

excess saving = the capital

account balance

e. Implications:

1. A nation which produces more than

it spends will

save more than it

invests domestically with a net capital

outflow producing a

capital account

deficit.

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

2. A nation which spends more

than

it produces has a net capital inflow

producing a capital account

surplus.

3. A healthy economy will tend to

run a current account deficit.



22



THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

C.

THE LINK BETWEEN THE

CURRENT AND CAPITAL

ACCOUNTS

1.

Beginning identity

NI - NS = X - M

(5.4)

where X = exports

M = imports

X-M=current account

balance (CA)

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

2.

3.



Combining (5.3) + (5.4)

S - I = X - M

(5.5)

If S - I = Net Foreign

Investment (NFI)

NFI = X - M



(5.6)

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

4. Implications:

a.

If CA is in surplus, the

nation must be a net

exporter of capital.

b.

If CA is a deficit, the nation

is a major capital importer.

c.

When NS > NI, the excess

must be acquired through

foreign trade.

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

d. Solutions for Improving CA

deficits:

1.) Raise national income

(output)

relative to domestic

investment (I).

2.) Increase (S) relative to

domestic investment (I).

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

D. GOVERNMENT BUDGETS AND

CURRENT ACCOUNT DEFICITS

1. CURRENT ACCOUNT BALANCE

CA = Saving Surplus - Gov’t

budget deficit

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THE INTERNATIONAL FLOW OF

GOODS, SERVICES, AND CAPITAL

2. CA Deficit means

the nation is not saving

enough to finance (I) and the

deficit.

3. CA Surplus means

the nation is saving more

than needed to finance its

(I)

and deficit.

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PART II. THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL

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