ECON103 Chapter ECON103: The International Flows of Goods and Capital
The International Flows of Goods and Capital
• The Flow of Goods: Exports, Imports and Net Exports:
o Exports are domestically produced goods and services that are sold abroad, and
Imports are foreign-produced goods and services that are sold domestically.
o The net exports of any country are the difference between the value of its exports
and the value of its imports:
Net eports = Value of coutr’s eports – Value of coutr’s iports
o Trade balance: the alue of a atio’s epots ius the alue of its iports; also,
called net exports
o Trade surplus: an excess of exports over imports
o Trade deficit: an excess of imports over exports
o Balanced trade: a situation in which exports equal imports
• The Flow of Financial Resources: Net Capital Outflow
o Net capital outflow refers to the difference between the purchase of foreign assets
by domestic residents and the purchase of domestic assets by foreigners:
Net capital outflow = Purchase of foreign assets by domestic residents
– Purchase of domestic assets by foreigners.
o Some variables that influence net capital outflow:
â–Ş The real interest rates paid on foreign assets
â–Ş The real interest rates paid on domestic assets
â–Ş The perceived economic and political risks of holding assets abroad
â–Ş The government policies that affect foreign ownership of domestic assets
• The Equality of Net Exports and Net Capital Outflow:
o An important but subtle fact of accounting states that, for an economy as a whole,
net capital outflow (NCO) must always equal net exports (NX):
NCO = NX.
o When a nation is running a trade surplus (NX > 0), it is selling more goods and services
to foreigners than it is buying from them. What is it doing with the foreign currency it
receives from the net sale of goods and services abroad? It must be using it to buy
foreign assets. Capital is flowing out of the country (NCO > 0).
o When a nation is running a trade deficit (NX < 0), it is buying more goods and services
from foreigners than it is selling to them. How is it financing the net purchase of these
goods and services in world markets? It must be selling assets abroad. Capital is
flowing into the country
(NCO < 0).
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Document Summary
The international flows of goods and capital: the flow of goods: exports, imports and net exports, exports are domestically produced goods and services that are sold abroad, and. Imports are foreign-produced goods and services that are sold domestically: the net exports of any country are the difference between the value of its exports and the value of its imports: Net capital outflow = purchase of foreign assets by domestic residents. Nco = nx: when a nation is running a trade surplus (nx > 0), it is selling more goods and services to foreigners than it is buying from them. It must be using it to buy foreign assets. Capital is flowing out of the country (nco > 0): when a nation is running a trade deficit (nx < 0), it is buying more goods and services from foreigners than it is selling to them. Y = c + i + g + nx. National saving (s) equals y c g.
