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Chapter 10: Q. 9 (page 265)

How does the bottom portion of Figure 10.3, showing the international flow of investments and capital, differ from the upper portion?

Short Answer

Expert verified

Bottom is the investment flow and the top is goods & services exchange.

Step by step solution

01

Step1. Given Information

Given information is the following flow diagram:

02

Step2. Explanation

The bottom part of the diagram, i.e. the one which talks about the flow foreign investment, investment income received, investment income paid and the investment from abroad, these all flows are related to the flow of investment income, i.e. these are the capital inflows and outflows.

The top part of the flow diagram talks about exports and imports and their related payments, which is more about the trade part. It talks of the trade of goods and services and attached movement of the money in form of income received and payments made.

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Most popular questions from this chapter

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

a. Living in an especially large country

b. Having a domestic investment rate much higher than the domestic savings rate

c. Having many other large economies geographically nearby

d. Having an especially large budget deficit

e. Having countries with a tradition of strong protectionist legislation shutting out imports

Table 10.7 provides some hypothetical data on

macroeconomic accounts for three countries represented

by A, B, and C and measured in billions of currency

units. In Table 10.7, private household saving is SH,

tax revenue is T, government spending is G, and

investment spending is I.


ABC
SH700500600
T00500500
G600350650
I800400450

Table 10.7 Macroeconomic Accounts

a. Calculate the trade balance and the net inflow of

foreign saving for each country.

b. State whether each one has a trade surplus or

deficit (or balanced trade).

c. State whether each is a net lender or borrower

internationally and explain.

What are the main components of the national savings and investment identity?

A government official announces a new policy.

The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.

Imagine that the U.S. economy finds itself in the

following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by

\)50 billion, while the budget deficit and national savings remain the same?
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