net capital outflow

Examples of net capital outflow in the following topics:

• Open Economy Equilibrium

  • The economy's output (Y) equals the sum of the consumption of domestic goods (Cd), the investment in domestic goods and services (Id), the government purchase of domestic goods and services (Gd), and the net exports of domestic goods and services (NX).
  • The amount that a country saves is total of investment and net exports:
  • In an open economy, market actors can choose to save, spend, and invest either domestically or internationally, so relative changes affect not only the flow of capital, but also the health of the economy as a whole.
  • Although consumption does not always equal production, the net capital outflow does equal the balance of trade.
  • The capital flows, which depend on interest rates and savings rates, also adjust to reach equilibrium.

• The Balance of Trade

  • It is measured by finding the country's net exports.
  • The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy compared to those in the importing economy
  • The twin deficits hypothesis implies that as the budget deficit grows, net capital outflow from a country falls.
  • In the U.S., net borrowing has tended to have a direct relationship with net imports.
  • The red line represents net imports, which is equivalent to the negative balance of trade, and the black line represents net borrowing, which is equivalent to the government budget deficit.

• The Capital Account

  • The capital account acts as a sort of miscellaneous account, measuring non-produced and non-financial assets, as well as capital transfers.
  • The first is a broad interpretation that reflects the net change in ownership of national assets.
  • The capital account can be split into two categories: non-produced and non-financial assets, and capital transfers.
  • For example, if a domestic company acquires the rights to mineral resources in a foreign country, there is an outflow of money and the domestic country acquires an asset, creating a capital account deficit .
  • Thus, the balance of the capital account is calculated as the sum of the surpluses or deficits of net non-produced, non-financial assets, and net capital transfers.

• The Current Account

  • The current account represents the sum of net exports, factor income, and cash transfers.
  • The net factor income records a country's inflow of income and outflow of payments.
  • Income refers not only to the money received from investments made abroad (note: the investments themselves are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home.
  • In calculating the current account, exports are marked as a credit (inflow of money) and imports are marked as a debit (outflow of money).
  • Where CA is the current account, X and M and the export and import of goods and services respectively, NY is net income from abroad, and NCT is the net current transfers.

• The Financial Account

  • The financial account measures the net change in ownership of national assets.
  • The financial account (also known as the capital account under some balance of payments systems) measures the net change in ownership of national assets.
  • Other investment includes capital flows into bank accounts or provided as loans.
  • To calculate the total surplus or deficit in the financial account, sum the net change in FDI, portfolio investment, other investment, and the reserve account.
  • The outflow or inflow of assets in the financial account depends in large part on the domestic interest rate and how it compares to interest rates in other countries.

• The Balance of Payments

  • Whenever a country has an outflow of funds, such as when the country imports goods and services or when it invests in foreign assets, it is recorded as a debit on the balance of payments.
  • It includes the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors), and cash transfers.
  • The capital account is typically much smaller than the other two and includes miscellaneous transfers that do not affect national income.
  • Debt forgiveness would affect the capital account, as would the purchase of non-financial and non-produced assets such as the rights to natural resources or patents.
  • Deficits in the current account must be offset by surpluses in the financial and capital accounts.

• Reason for a Zero Balance

  • The left-hand term is net exports - the difference between the amount of goods and services a country exports and the amount that it imports.
  • Because of this, the inflows and outflows of money are equal, creating a balance of payments equal to zero.

• Relationship Between Output and Revenue

  • There are many factors that influence the level of output including changes in labor, capital, and the efficiency of the factors of production.
  • The performance of a company is determined by how its asset inflows (revenues) compare with its asset outflows (expenses).

• Long-Run Implications of Fiscal Policy

  • Expansionary fiscal policy can lead to decreased private investment, decreased net imports, and increased inflation.
  • Some also believe that expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income.
  • When government borrowing increases interest rates it attracts foreign capital from foreign investors.
  • In other words, companies wanting to finance projects must compete with their government for capital so they offer higher rates of return.
  • Therefore, when foreign capital flows into the country undergoing fiscal expansion, demand for that country's currency increases.

• Introducing Aggregate Demand

  • This is the money spent by firms on capital investment (new machinery, factories, stocks, etc.).
  • Net Export (NX):This can be put simply as the sale of goods to foreign countries subtracted by the purchase of goods from other countries (X-M).
  • From a quantitative perspective this is simply expressed as: Spending = Income + Net Increase in Debt.
  • Spending capital prior to the receipt of capital is an important consideration at both the consumer level and the government level (deficit spending).
  • The aggregate demand curve is derived via the consumption, investment, government spending, and net export.