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Foreign Investment. Main Points to Learn:. What is the connection between investment and economic growth? What is net foreign investment ? What factors move capital from one country to another? Why does NFI = NX?
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Main Points to Learn: • What is the connection between investment and economic growth? • What is net foreign investment? • What factors move capital from one country to another? • Why does NFI = NX? • The difference between being a net borrower and being a net lender (Which is the U.S.?)
Stolen from Greg Mankiw’s Blog(he stole it from John Taylor)
Net Foreign Investment • Net foreign investment is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners. • Capital inflows: Foreign money coming into the U.S., including loans made to the U.S. • Capital outflows: U.S. dollars leaving the country to be invested abroad
Net Foreign Investment • National Saving. Whenever a nation saves a dollar, it can use that dollar to finance the purchase of domestic capital or to finance the purchase of an asset abroad. Thus the supply of loanable funds comes from national saving. • Saving = Domestic Investment + Net Foreign investment. • NFI = NX
Direct vs. Portfolio Investment • Foreign Direct Investment—A capital investment that is owned and operated by a foreign entity. • e.g. If Ford Motor Company builds and operates a plant in Mexico, that represents foreign direct investment. • Foreign Portfolio Investment—An Investment financed with foreign money, such as investors buying stock in a foreign company run by people in that country.
Factors that Influence Net Foreign Investment • The real interest rates being paid on foreign assets • The real interest rates being paid on domestic assets • The perceived economic and political risks of holding assets abroad • Government policies that affect foreign ownership of domestic assets (like corporate tax rates)
Trade Surplus and Trade Deficit • trade surplus:output > spending and exports > imports Size of the trade surplus = NX • trade deficit:spending > output and imports > exports Size of the trade deficit = –NX
U.S.—World’s Largest Debtor • Every year since 1980s: huge trade deficits and net capital inflows, i.e. net borrowing from abroad • As of 12/31/2008: • U.S. residents owned $19.9 trillion worth of foreign assets • Foreigners owned $23.4 trillion worth of U.S. assets • U.S. net indebtedness to rest of the world:$3.5 trillion--higher than any other country, hence U.S. is the “world’s largest debtor nation”
