Net Exports and International Finance

Read this chapter to examine the reasons nations trade and the way net exports determinants influence aggregate demand and the equilibrium GDP and price level in a country. Also, learn about the balance of payments components and the way financial capital flows mirror the trade balance. The chaper also defines and compares various types of exchnage rate systems.

2. International Finance

KEY TAKEAWAYS

  • The balance of payments shows spending flowing into and out of a country.
  • The current account is an accounting statement that includes all spending flows across a nation's border except those that represent purchases of assets. In our simplified analysis, the balance on current account equals net exports.
  • A nation's balance on capital account equals rest-of-world purchases of its assets during a period less its purchases of rest-of-world assets.
  • Provided that the market for a nation's currency is in equilibrium, the balance on current account equals the negative of the balance on capital account.
  • There is no economic justification for viewing any particular current account balance as a good or bad thing.