In an open economy, national saving equals
LEARNING OBJECTIVES. A. When an economy is closed then (1) aggregate spending must equal domestic production, and (2) national saving must equal domestic investment. B. When the economy is open, these conditions do not have to hold.a. Aggregate spending does not have to equal domestic production in each period.II. Relation between Saving, Investment, foreign trade, and foreign lending. Case 1. In a Small Open Economy. A. Small open economy: an economy which its saving/investment activities have no effect on the world real interest rate. 1. World real interest rate (rw) is determined in the international financial market. 2. In an open economy, national savings equals. $70bill. A country has national saving of $70 billion, government expenditures of $ 20 billion, domestic investment of $30 billion and net capital outflow of $ 40 billion.n an open economy, national savings equals. $70bill. A country has national saving of $70 billion, government expenditures of $ 20 billion, domestic investment of $30 billion and net capital outflow of $ 40 billion. If a country has an open economy, that country's spending in any given year need not equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners.As of 2014 no totally closed economy exists.e can divide expenditure on an open economy’s output Y into four components: Cd, consumption of domestic goods and services, Id, investment in domestic goods and services, Gd, government purchases of domestic goods and services, X, exports of domestic goods and services. There are a number of economic advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose.Additionally, consumers have an opportunity to invest their savings outside of the country.e can divide expenditure on an open economy’s output Y into four components: Cd, consumption of domestic goods and services, Id, investment in domestic goods and services, Gd, government purchases of domestic goods and services, X, exports of domestic goods and services. • In a closed economy the level of interest rate would be determined by the intersection of investment curve and savings curve (r clo). • In case of small open economy, when world’s interest rate is higher than for closed economy (r 1 *) we will face a current account surplus. Yet, in case of a big country, we suppose that its policy may influence world’s interest rate. Hence, an expansionary fiscal policy will cause a decrease in world’s savings and an increase in world’s interest rate. As a result, small open economy will face capital account deficit and current account surplus. 24. In a large open economy, the real interest rate is determined by: national saving, the domestic investment function, and the net capital outflow function. national saving, the domestic investment function, and the net-exports function.6. In the small open economy in equilibrium: saving is fixed and investment is determined by the investment function and the world interest rate. investment is fixed and saving is determined by the saving function and the world interest rate. C. depends on the foreign interest rate. depends only on domestic saving. In a large open economy, the real interest rate is determined by: national saving, the domestic investment function, and the net capital outflow function. national saving, the domestic investment function, and the net-exports function.6. In the small open economy in equilibrium: saving is fixed and investment is determined by the investment function and the world interest rate. investment is fixed and saving is determined by the saving function and the world interest rate. In a small open economy, if the government encourages investment, say through an investment tax credit, investment: increases and is financed through an increase in national saving. increases and is financed through an increase in exports. increases and is financed through an inflow of foreign capital.6. In the small open economy in equilibrium: saving is fixed and investment is determined by the investment function and the world interest rate. investment is fixed and saving is determined by the saving function and the world interest rate. D. imports are less than exports. 14. In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: A. –$25 billion.B. –$10 billion.C. $10 billion.n a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: A. –$25 billion. B. –$10 billion. C. $10 billion. III. Relation between Saving, Investment, foreign trade, and foreign lending. Case 1. In a Small Open Economy. A. Small open economy: an economy which its saving/investment activities have no effect on the world real interest rate. 1. World real interest rate (rw) is determined in the international financial market. 2.II. Relation between Saving, Investment, foreign trade, and foreign lending. Case 1. In a Small Open Economy. A. Small open economy: an economy which its saving/investment activities have no effect on the world real interest rate. 1. World real interest rate (rw) is determined in the international financial market. 2.
Domestic investment