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Foreign Investment

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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 ... – PowerPoint PPT presentation

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Title: Foreign Investment


1
Foreign Investment
2
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.?)

3
Stolen from Greg Mankiws Blog(he stole it from
John Taylor)
4
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

5
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

6
Direct vs. Portfolio Investment
  • Foreign Direct InvestmentA 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 InvestmentAn Investment
    financed with foreign money, such as investors
    buying stock in a foreign company run by people
    in that country.

7
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)

8
Corporate Tax Rates in Other Nations
9
Trade Surplus and Trade Deficit
  • trade surplus output gt spending and exports
    gt imports Size of the trade surplus NX
  • trade deficit spending gt output and imports
    gt exports Size of the trade deficit NX

10
U.S.Worlds 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 world3.5
    trillion--higher than any other country, hence
    U.S. is the worlds largest debtor nation

11
Should we worry?
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