Question

In an open economy is the investment rate determined by the domestic savings rate? Does national income coincide with GDP? What is the distinction between the domestic capitalstock and national wealth?

( International Macroeconomic)

Answer 1

(a) In an open economy, investment rate is not determined by domestic interest rate. If capital is mobile across countries, capital will flow in (out of) a country if its domestic interest rate is higher (lower) than other countries, adjusted for exchange rate differential. Therefore, if there is net capital inflow (outflow), investment rate will be higher (lower).

(b) National income and GDP are different in an open economy, where

National income = GDP + Factor income received from abroad - Factor income sent abroad

Unless Factor income received from abroad and Factor income sent abroad are equal, National income and GDP are not the same.

(c) Domestic capital stock is the total value of all assets owned by residents inside the country, but national wealth is value of assets owned by residents inside the country plus the value of assets owned by residents living abroad.