Here is an addition to the second edition of Mankiw / Belzile, in preparation. It focuses on the current account.
The net outflow of capital (CNS) represent the difference between the dollar value of foreign assets bought by domestic residents and the value dollar assets purchased by foreign nationals. Thus, when a Mexican spend $ 100 to buy 10 shares of Tim Hortons ($ 10 per share), there is a financial capital inflow of $ 100 in Canada. When Canadian spends $ 160 to buy 40 shares of Telmex, the Mexican phone company ($ 4 per share), there is rather a capital outflow of $ 160 in Canada. The net effect of these two transactions is a net outflow of $ 60.
Another pair of financial flows may be associated with these two transactions involving shares. Later, Tim Hortons will presumably pay dividends to the Mexican who has purchased 10 of its shares. Assume that the dividend represents 3 percent of share prices: the payment of dividends will result in a future release of financial capital of $ 0.30 per share, or $ 3 in total. Similarly, it is possible that Telmex will pay a dividend to a Canadian who has purchased his shares. Suppose a dividend of 5%: $ 0.20 Canadian will then receive a share or a total of $ 8. These two payments (by Tim Hortons and Telmex) will result in a net inflow of $ 5 dividend. Other transactions can also occur, such as purchases and sales of bonds. These exchanges lead to later interest payments.
We consider purchases shares (which in this example result in a net outflow of $ 60) in our measure of net capital outflow (CNS). But how to account for financial capital flows resulting from payments of future dividends? Same for the bond purchases: we take into account in the net outflow of capital, but what to do with the financial capital flows resulting from future interest payments?
The answer is simple: they are measured in the current account balance. We define the current account balance as follows:
Current Account Balance = Net Exports + Enter net dividend and interest
Thus, the current account balance measures the payments received from abroad in exchange for goods and services (including interest and dividends) less similar payments to foreigners. We have already discussed the most important part of the current account when we discussed exports, imports and net exports. However, we did not discuss explicitly the net flow of dividends and interest for two reasons. First, they are small when compared with net outflows of capital that are at their origin (in our example above, the net outflow of $ 60 a net inflow of future dividends of only $ 5). Second, because the flow of dividend payments and interest does not occur until later and continues for several periods (as has the Canadian shares of Telmex and the Mexican has those of Tim Hortons), the analysis of effects events that may create a net outflow of capital is thereby complicated. For these reasons, the second part of the current account balance is often ignored in the basic analysis of open economies. Note however that in Figure 12.1, interest receipts and dividends were included in exports, while payments of interest and dividends were included in exports.
students more "on" may have also noticed that the difference between GDP and GNP is precisely in international payments of interest and dividends. To calculate the GDP, one share of GDP and subtracting income paid to non-residents, then we add the value of income from abroad and received by Canadian residents. In fact, when one uses the concept of GNP, the current account is defined as equal to net exports.
