Net Foreign Investment Case Study

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Introductory Macroeconomics Kgabane Obakeng Kgasoane (27546101) Assignment Question 1 Net foreign investment is the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners (Gans, J. King, S. Stonecash, R. & Mankiw, N, 2012, p. 741) and the international capital flows are best described as the financial side of international trade, they are considered the financial side of international trade because when a buyer imports a good or a service then a monetary payment is made to the seller. In an open economy the buying and selling of financial assets in the financial markets will generate flows of capital. Net foreign investment measures the international flow of capital because when the net foreign…show more content…
King, S. Stonecash, R. & Mankiw, N, 2012, p. 738) allow for us to measure the international flow of capital, a trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports and a trade surplus occurs when a country sells or exports more goods to other countries than it buys or imports. A trade surplus, which an excess of exports over imports ((Gans, J. King, S. Stonecash, R. & Mankiw, N, 2012, p. 738) will mean that there is a net inflow of domestic currency from the foreign markets and a trade deficit, which is an excess of imports over exports ((Gans, J. King, S. Stonecash, R. & Mankiw, N, 2012, p. 738) will mean that there is a net outflow of domestic currency to other…show more content…
The purchasing power parity theory states that there will be an increase in demand for the cheaper items of country 1 by country 2 and this will result in the increase in demand for country 1’s Question 3 What effect does a change in consumer confidence have on the market of loanable funds? Consumer confidence is best described as a measure of how consumers feel about their ability to earn income in the future and a change in consumer confidence is an event that shifts the supply of savings in the market for loanable funds. A decrease in consumer confidence means that consumers feel that they will be making a lower income in the future or they may feel that it is likely they will lose their job. As a result of the decreased confidence consumers will decide to save more money today and decrease their current consumption in order to prepare for the future which means that the quantity of loanable funds in the market for loanable funds will increase.

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