Open Economy Concepts and Capital Flows

An open economy interacts with other economies around the world, while a closed economy does not.

Net exports are the value of a nation's exports minus its imports; it is also known as the trade balance.

Net capital outflow (NCO) is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners, and it is also referred to as net foreign investment (NFI).

<p>The two forms are foreign direct investment, where a foreign owner actively manages the asset, and foreign portfolio investment, where ownership is more passive.</p> Signup and view all the answers

<p>When Alberta exports oil to the US, it increases net exports, which correspondingly raises net capital outflow as Alberta receives US dollars.</p> Signup and view all the answers

<p>A trade surplus occurs when net exports are positive, meaning exports exceed imports, while balanced trade occurs when exports equal imports.</p> Signup and view all the answers

<p>Canadians can buy shares in foreign companies and acquire various foreign assets such as government and corporate debt.</p> Signup and view all the answers

<p>A trade deficit occurs when net exports are negative, indicating that a country imports more than it exports.</p> Signup and view all the answers

<p>National saving is calculated as S = Y - C - G, where Y is national income, C is consumption, and G is government spending.</p> Signup and view all the answers

<p>It signifies that national saving is equal to domestic investment plus net capital outflow.</p> Signup and view all the answers

<p>Nominal exchange rate is the rate at which one currency can be exchanged for another, such as British pounds per Canadian dollar.</p> Signup and view all the answers

<p>The real exchange rate is calculated as nominal exchange rate multiplied by the domestic price divided by the foreign price.</p> Signup and view all the answers

<p>The law of one price implies that identical goods should sell for the same price in different countries when expressed in a common currency.</p> Signup and view all the answers

<p>Nominal exchange rate adjustments could occur through changes in prices or fluctuations in the exchange rate itself.</p> Signup and view all the answers

<p>One reason PPP might not hold is that not all goods are easily traded, such as services like haircuts.</p> Signup and view all the answers

<p>Perfect capital mobility is the condition where economies can fully access world financial markets and vice versa.</p> Signup and view all the answers

<p>Interest rate parity is the theory that real interest rates on comparable assets should be the same across economies with full market access, ensuring fair investment conditions.</p> Signup and view all the answers

<p>If rw &gt; r, Canadians would be more inclined to save by purchasing foreign assets rather than domestic ones.</p> Signup and view all the answers

<p>Some financial assets may be riskier due to potential defaults, requiring a higher interest rate to compensate for this risk.</p> Signup and view all the answers

<p>A lower real exchange rate indicates that a country's goods are cheaper relative to foreign goods.</p> Signup and view all the answers

<p>Net capital outflow (NCO) reflects the amount of money leaving the country for foreign investments and affects the overall level of domestic investment.</p> Signup and view all the answers

<p>Government policies, such as taxes and regulations, can influence the net returns on investments, affecting interest rates and capital flows.</p> Signup and view all the answers