tailieunhanh - Ten Principles of Economics - Part 65

Ten Principles of Economics - Part 65. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 29 OPEN-ECONOMY MACROECONOMICS BASIC CONCEPTS 663 Mexican government has imposed or might impose in the future on foreign investors in Mexico. THE EQUALITY OF NET EXPORTS AND NET FOREIGN INVESTMENT We have seen that an open economy interacts with the rest of the world in two ways in world markets for goods and services and in world financial markets. Net exports and net foreign investment each measure a type of imbalance in these markets. Net exports measure an imbalance between a country s exports and its imports. Net foreign investment measures an imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners. An important but subtle fact of accounting states that for an economy as a whole these two imbalances must offset each other. That is net foreign investment NFI always equals net exports NX NFI NX. This equation holds because every transaction that affects one side of this equation must also affect the other side by exactly the same amount. This equation is an identity an equation that must hold because of the way the variables in the equation are defined and measured. To see why this accounting identity is true consider an example. Suppose that Boeing the . aircraft maker sells some planes to a Japanese airline. In this sale a . company gives planes to a Japanese company and a Japanese company gives yen to a . company. Notice that two things have occurred simultaneously. The United States has sold to a foreigner some of its output the planes and this sale increases . net exports. In addition the United States has acquired some foreign assets the yen and this acquisition increases . net foreign investment. Although Boeing most likely will not hold on to the yen it has acquired in this sale any subsequent transaction will preserve the equality of net exports and net foreign investment. For example Boeing may exchange its yen for dollars with a . mutual fund that .