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Net exports and capital outflows - YouTube
Channel: Khan Academy
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let's take a look at our gdp equation
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for an open economy so gdp is equal to
[5]
national income and that's going to be
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equal to consumption plus investment
[11]
plus government spending and since this
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is an open economy plus
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net exports
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now the first thing i want to do is
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let's solve for net exports so i'm going
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to subtract all of this stuff from both
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sides so i could get national income
[27]
minus consumption
[29]
minus government spending
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minus investment is equal to
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net exports this is just a manipulation
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of what we just saw
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now what is
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national income minus consumption minus
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government spending
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well this right over here is national
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savings
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this is s so another way we can think
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about it is national savings
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minus investment
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is equal to net exports
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so let's use this to think about capital
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flows
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so first of all let's just make sure we
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know what a capital flow is so let's
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think about a capital inflow what does
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that mean that means that foreigners are
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taking capital and taking it into our
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country to buy assets in our country and
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an outflow that means that residents of
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our country are taking capital out of
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the country and buying foreign assets
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and so do you think our savings minus
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our investment is going to be a capital
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inflow or capital outflow
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well we've saved a bunch of stuff and we
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are spending some of it on investment
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and so what do we do with the rest of it
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well it's going to have to go outside of
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the country because if it was being
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invested inside the country it would be
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in this eye right over here
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and so this is a net
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capital
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capital
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outflow
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and you'll sometimes see this
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abbreviated n
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c o
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and so that sets up the identity that
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net capital outflows are equal to net
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exports let me just write it again for
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emphasis
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net capital outflows are equal to
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net exports now why does this make sense
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well let's say net exports are positive
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that means more foreigners are buying
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our goods than we are buying their goods
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now how are they going to pay for those
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goods well they're going to have to pay
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for those goods and we're not going to
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go into the details of currency exchange
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and all that but one way to think about
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how they pay for those goods is that
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they need to sell their foreign assets
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to folks in our country so if it's folks
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in our country who are buying foreign
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assets so that the foreigners can buy
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our goods that would be a net capital
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outflow from our point of view so
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hopefully that makes intuitive sense now
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another way to think about this is we
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could rearrange this equation where if
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we subtract net exports from both sides
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and then add investment to both sides we
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could get
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national savings
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minus net exports
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minus net exports is equal to
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investment
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now if net exports is equal to net
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capital outflows what would be the
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negative of net exports b well this
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would be net capital inflows so we could
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set up another equation and these are
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all fairly straightforward algebra but
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they give us a little bit of intuition
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of how to think about these different
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levers so we could say
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savings
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plus
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i'll write the word out net
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capital
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inflow
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is equal to investment
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is equal to investment and think about
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why this makes sense if we're if we have
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investment in our country maybe we're
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building factories we're building roads
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where is the capital for that investment
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coming
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it's either coming from domestic savings
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national savings right over here or it's
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coming from foreigners bringing capital
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into our country which can be used for
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investment so i will leave you there the
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big takeaway is is we can just
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manipulate the gdp equation for an open
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economy here to get to this notion that
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net capital outflows are equal to net
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exports or that the negative of net
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exports which would be net imports is
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equal to net capital inflows and
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hopefully this makes some intuitive
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sense
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