We are introduced with the concept of an open economy, one that interacts freely with other economies around the world. These interactions occur in two forms: the buying and selling of goods and services in world product markets and the buying and selling of capital assets such as stocks and bonds in world financial markets. When there is a trade deficit, exports are less than imports, net exports are negative, saving is less than investment, and net capital outflow is negative; the reverse is true of trade surpluses; balanced trade lies in the middle.
There were several identities in this chapter. The new ones were net exports (also called trade balance) and net capital outflow (also called net foreign investment). Net exports refer to the value of a nation's exports minus the value of its imports. If net exports is positive, the country is said to run a trade surplus, or an excess of exports over imports. If NX<0, it is a trade deficit, and if NX=0, it is said to have balanced trade. Net capital outflow is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. If NCO>0, domestic residents are buying more foreign assets than foreigners buying domestic assets. Capital is flowing out of the country. If NCO<0, a country is experiencing a capital inflow.
The idea of saving, investment, and their relationship to the international flows was also expanded. We previously learned Y=C+I+G, and in this chapter, NX was added to the right side of the equation due to the concept of an open market economy. Also, S=I+NCO (saving=domestic investment+net capital outflow).
This chapter was kind of confusing because there is a lot of terminology. However, I feel like it is mostly memory and just needs repetition. I was a little confused about the part with trade deficits induced by a fall in savings or by an investment boom; and the effects of each.
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