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Balance of Payments

Net Exports Equal Net Foreign Investment


Net Exports Equal Net Foreign Investment

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So when you go on a spending spree, you're gonna need to finance that, right? If you're spending more than your salary, you go out there and you buy a new car, you buy a new house, you're gonna need to borrow some money. The same thing happens on a macroeconomic scale for countries, Okay, let's see how that works. So let's think about the relationship here between net exports and net foreign investment. So on a macroeconomic scale, when we think about this, we think about countries that are importing more than they export, right? So they're bringing in more stuff. They're buying stuff from other countries, but they're not selling that much stuff to other countries, right? They're importing stuff, but not exporting. So they're gonna have to finance these extra purchases, right? They're gonna have to make up the difference between these exports and these imports and the financing comes from one of two places. Right? So it's the same thing as you, if you go and you buy this new car and you've got to make these car payments, you might sell your Nintendo, you sell your guitar to be able to make the payments right? You'll sell some assets to be able to make the payment or you borrow money. You just borrow money. Okay, So that's the same thing for countries, the country can sell their assets such as land or factories to foreigners, right? So now it's the foreigners who we need to make up this difference to or they can borrow from foreigners as well. Right? Remember we're trying to make up this difference between our imports and exports. So this money has to come in from overseas. So we break this up into two categories. We call what's called foreign direct investment. Which is also, you know we say F. D. I. Foreign direct investment. That's where they buy physical capital right? By domestic citizen in a foreign country or by a foreigner in a in a domestic domestically this is physical capital. So we're thinking about something like pizza hut. A US company builds a restaurant in Romania right? They now own a restaurant in Romania. So we're thinking about physical capital like something physically there like a building something like that compare that to foreign portfolio investment. So and this happens both ways right? This can be BMW building a factory in the US, right? BMW being a foreign country, foreign company building something in the U. S. Or a US uh citizen building something overseas. Where for foreign portfolio investment. Well this is financial assets um by purchase of a financial asset by domestic citizen in a foreign country or vice versa. So johnny America buy stock in Telmex, mexican telecommunications corporation. Right now a U. S. Citizen is buying um a financial investment in a foreign country. Okay so those are that's the two ways we break it up is the direct investment of physical capital like land or factories and then the portfolio investment when it comes to buying stocks or bonds. Okay so when we think about net foreign investment right? The net foreign investment, this is that difference we're trying to make up between exports and imports, it's the difference between these two things. So the foreign assets bought by US citizens such as this pizza hut building a restaurant in Romania or johnny America buying these uh stock in Telmex. And then the opposite right? When some foreign company like the BMW building the factory in the US or some foreign citizen buying US stock or US bonds, something like that. Okay, so the difference between those two is our net foreign investment. So what we're gonna see here is that net exports has to equal net foreign investment because of this balance. The difference between the exports and imports needs to be made up through this foreign investment. Okay, so let's see how this works in an example. So we've got marco Salt life, a U. S. Citizen shapes surfboards, He sells the surfboard to a customer in Japan for 10,000 yen. Okay, so he sold this surfboard in Japan for yen. So he didn't receive dollars, He received the N. So the sale of the surfboard, well what does this do to net exports? We sold the surfboard, we exported a surfboard. So we increase net exports right? Because a U. S. Citizen sold something overseas that is an export, it increases net exports and then the yen that marco got, it increases net foreign investment right? Because now he owns yen marco acquired a foreign asset, right? So in this case, what he acquired is the yen itself, the yen itself is a foreign investment because he's not holding dollars anymore, a U. S. Asset, he's holding a foreign asset which are yen, he is using his income. So the money he earned by shaping a surfboard and selling it to invest in yen at this point, right? He bought, he sold it in yen instead of selling it in dollars. So he invested in yen, he expects this yen to hold its value. Now let's let's take it a step further suppose that MArco uh MArco decides to use his 10,000 yen to purchase a Japanese bond investment. Okay, so now instead of holding yen, he's going to use that yen to buy an investment over there, he's buying a Japanese bond, the results stay the same. The sale of the surfboard still increases our net exports while the purchase of the bond increases our net foreign investment. Right? Because this is the same thing, he's made a portfolio investment. He's bought japanese uh bond right here, this Japanese bond is a foreign asset owned by now a U. S. Citizen, MArco. Okay, Now finally is the last one is where Marco decides to use the 10,000 yen to instead purchase the latest Nintendo system. Right? So now instead of buying a bond, he took that 10,000 yen and bought a Nintendo? Well now the sale of the surfboard increases net exports still. Right? But what happens with the purchase of the Nintendo now a U. S. Citizen is purchasing a foreign asset? Right. He's excuse me purchasing a foreign good. Right? This isn't a long term asset anymore. He's buying a good and importing it to the U. S. So this decreases Our net export. So it kind of washes out. In this case he exported something worth 10,000 and then imported something worth 10,000. So there was a net zero in that case. However in all cases the net exports equal to the net foreign investment even in this last one because it was just zero, right? There was no net foreign investment, there was just an increase in net exports and a decrease in net exports. Okay so in all cases um what we're seeing is that any um. any sale of of a good overseas increases the net foreign investment. Right? And um this happens on, we have studied one transaction here but it expands to the whole economy if we imported something, well now a foreigner is holding us dollars and they've invested in U. S. Dollars in their their portfolio there. Okay so our net exports is always going to equal that net foreign investment because of making up that difference. Right? When we when we export something, well now we're holding a foreign asset in return for that export. Cool. Alright let's go ahead and move on to the next video