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Chapter 13

International Trade in Assets

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Current account analysis

• Small open economy

• Two period model with investment

• Current account

• Effect on current account

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Revisit Current Account

National saving is GNP minus consumption minus gov’t spending

S = Sp+ Sg= Y + NFP – C – G

Using Y = C + I + G + NX, we have ‘

S = I + NX + NFP

Defining the current account surplus:

S = I + CA

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Figure 13.10 Deviations from Trend in the Current Account

Surplus and GDP

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Figure 13.12 The Twin Deficits

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Figure 13.11 Government Spending and Taxes

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Small open economy

• Combine the closed economy with world interest rate

• Interest rate in SOE is world interest rate

• Yd=C+I+G+NX

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Figure 13.13 A Small Open-Economy Model with Production

and Investment

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Figure 13.14 An Increase in the World Real Interest Rate

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An Increase in the World Real Interest Rate

• CA increase

• Y increase

• I decrease

• C ?

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Figure 13.15 A Temporary Increase in Government

Spending

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Figure 13.17 An Increase in Current Total Factor

Productivity

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Figure 13.18 An Increase in Future Total Factor

Productivity

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Figure 13.19 Investment as a Percentage of GDP