The basic relation in open economy macroeconomics is NX = NCO. What is the relation of...

The basic relation in open economy macroeconomics is NX = NCO. What is the relation of this equation with the savings and if investments is to exceed savings, what is to be done?

Expert Solution

The equality is derived as for , we have or or , for S be the national savings. Also, we have since as every transaction that affects NX, also equally affects the NCO, which can be interpreted as NCO (money/finance market) finances the NX (goods and service market).

Hence, the NX and NCO is equal to difference between saving and investment. If investment exceeds savings, we have , ie the equation would be balanced by negative NX meaning that imports would exceed the export, which in turn would be financed by negative NCO meaning that there would be in-flow of capital, ie the value of foreign people acquiring domestic assets (in this case the financial transaction for the imports) exceeds the value of domestic people acquiring foreing assets (financial transaction for the exports).

Hence, a negative saving investment difference would be balanced by neagative net exports which would be financed by negative net capital outflow.

Rahul Sunny answered 2 years ago

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The basic relation in open economy macroeconomics is NX = NCO. What is the relation of...

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