– [Instructor] Let’s take a look at our GDP equation for an open economy. So GDP is equal to national income. And that’s going to be

equal to consumption plus investment, plus government spending. And since this is an open

economy, plus net exports. Now, the first thing I want to do is let’s solve for net exports. So I’m gonna subtract all of

this stuff from both sides. So I could get national

income minus consumption, minus government spending,

minus investment, is equal to the next exports. This is just a manipulation

of what we just saw. Now, what is national

income minus consumption, minus government spending? Well, this right over

here is national savings. This is S. So another way we can think about it is national savings minus investment is equal to net exports. So let’s use this to

think about capital flows. So first of all, let’s just make sure we know what a capital flow is. So let’s think about a capital inflow. What does that mean? That means that foreigners

are taking capital and taking it into our country

to buy assets in our country. And then outflow, that

means that residents of our country are taking

capital out of the country and buying foreign assets. And so do you think our

savings minus our investment is going to be a capital

inflow or a capital outflow? Well, we’ve saved a bunch of stuff, and we are spending some

of it on investment. And so what do we do with the rest of it? Well, it’s gonna have to

go outside of the country. Because if it was being

invested inside the country, it would be in this I right over here. And so this is a net

capital, capital outflow. And you’ll sometimes see

this abbreviated NCO. And so that sets up the identity that net capital outflows

are equal to net exports. Let me just right it again for emphasis. Net capital outflows are

equal to net exports. Now, why does this make sense? Well, let’s say net exports are positive. That means more foreigners

are buying our goods than we are buying their goods. Now how are they going

to pay for those goods? Well, they’re going to have

to pay for those goods, and we’re not going to go into the details of currency exchange and all of that, but one way to think about

how they pay for those goods is that they need to

sell their foreign assets to folks in our country. So if it’s folks in our country who are buying foreign assets so that the foreigners can buy our goods, that would be a net capital

outflow from our point of view. So hopefully that makes intuitive sense. Now, another way to think about this is we could rearrange this equation where if we subtract net

exports from both sides and then add investment to both sides, we could get national savings minus net exports, minus net exports, is equal to investment. Now, if net exports is equal

to net capital outflows, what would be the negative

of net exports be? Well, this would be net capital inflows. So we could set up another equation. And these are all fairly

straightforward algebra, but they give us a little bit of intuition of how to think about

these different levers. So we could say savings plus,

I’ll write the word out, net capital inflow is equal to investment. Is equal to investment. And think about why this makes sense. If we have investment in our country, maybe we’re building factories,

we’re building roads, where is the capital for

that investment coming? It’s either coming from domestic savings, national savings right over here, or it’s coming from foreigners bringing capital into our country which can be used for investment. So I will leave you there. The big takeaway is is

we can just manipulate the GDP equation for an open economy here to get to this notion

that net capital outflows are equal to net exports. Or that the negative of net exports, which would be net imports, is equal to net capital inflows. And hopefully this makes

some intuitive sense.

Didn't understand it

Im lost

sir, please upload videos of PHYSICS

don't get it

I get it ðŸ™‚

thanks, helped a lot for my exam prep

Easy to understand. Great.

Thanks for sharing! it summarized many pages of my ECON book in just 4mins

Yes

Thankyouu!!!!

tysm I was confused for so long why NCO was equal to NX cause I was thinking we would have more inflows of capital since they are buying our goods. Thanks for clearing it up!

It's national saving. Not national savings. You keep adding the 's' – this is incorrect.