Open blog #9 NCO=NX

This week I want to share a new knowledge I gain from EC 202 – “Net Capital Outflow=Net export”. First let me introduce what are those two words mean.

       

Net export (NX) is equal to the difference between exports and import. More detail about this is if net export bigger than zero, it calls “surplus”. If net export smaller than zero, it calls “deficit”.

       

 

         Net capital outflow (NCO) the difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners.

         Economists think net capital outflow is always equal to net export because a transaction that affects one side always affect the other equally.

         To let this more make sense, I found a very persuasive example to represent this idea.

         As US programmer sells software to Japanese company for 10,000 yen. US’s exports and net export rise. But what happened to the 10,000 yen? If simply held, this is a foreign asset held by a US resident, a capital outflow.

What else could happen? We also could buy stock in a Japanese company (a capital outflow), or buy Japanese goods which will increase in imports.

What else could happen? Maybe most likely, programmer exchanges yen for dollars at a US bank. But this wouldn’t change anything, because the bank has to do something with the yen.

         As Mankiw said:

“The international flow of goods and services and the international flow of capital are two sides of the same coin.”

Citation:

Mankiw, Brief Principles of Macroeconomics, 7th edition