Economics doubts to clear; please help

Dhananjay 2012

Hi,
I was just wondering if anyone can clear this doubt I have in economics; Let's say that a country's interest rates rise, for example US interest rates increase so that means the interest rate gets higher in the US than in the UK. Therefore, the British will save their money in the US. This will increase the demand for the dollar and the dollar will appreciate. Now my doubt is: all that money that British people save in US due to the higher interest rates there, is that money counted as "national income'' for US or it's just considered as foreign money not belonging to US? Is foreigner's money saved in domestic banks counted as national income for the domestic country as illustrated in the question above? Please help

Reply 1

slappyhours

National Income = GDP, which equals C (Consumption) + I (Investment) + G (Government Expenditure) + NX (Net Exports). I would believe that since placing money into other countries is a form of saving, it would not be accounted for in the USA's national income figure. I would describe it as the latter, foreign money held in US banks, or in some cases, stocks and shares, which are also forms of saving :smile:

Reply 2

Dhananjay 2012

Original post by slappyhours

Thank you for your answer; however, I have some confusion. You said national income = GDP which includes investment along with other things; so I would suppose that if the British save in US it's a form of investment for the US which would be included in GDP and thus national income, but then why do you say it won't be included in national income and it doesn't form part of GDP? Aren't foreign savings are a form of investment in a country?

Reply 3

Swayum

Original post by Dhananjay 2012

Investment in economics is anything that increases the productive capacity of the economy. Participation in financial markets (stock markets, foreign exchange, etc) does not count as investment and so it doesn't form part of the GDP.

Investment in every day language is different to investment in economics. You should think of investment in economics as increasing the "capital stock", i.e. buying more machines/tools to produce goods.

Reply 4

MagicNMedicine

If people from the UK are investing financial capital like money in the US then it will count in the capital account as an inflow to the US and an outflow to the UK, so it will come up in the balance of payments accounting.

Reply 5

slappyhours

Original post by Dhananjay 2012

like Swayum says, investment is defined as the 'addition of capital stock to a business or firm' - expenditure on acquiring new machinery, or offices, computers and the like. This is different to investment saving, whereby individuals choose not to spend their money, but place it in an interest-bearing account, for which they will receive a small proportion of money for doing it.

Original post by Swayum

Reply 6

gabriel 41

Original post by Dhananjay 2012

You are a stupid and foolish person. You've been studying economics all these years and you don't know what the simple term "investment" means. You act like such a chop but you're not going to have an excellent grade in your exams. You behave too foolishly. Stupid person!! From your theory in the first post I thought you're really intelligent but you don't know simple things shows you're no better than a starter in economics. Ha ha !!!!

Reply 7

MagicNMedicine

Original post by Dhananjay 2012

It depends on what form the foreign savings take. You can save in two main ways, either you can lend your money out to someone else who needs the money now and repays with interest, or you can purchase an asset and hope the asset increases in value. If you invest money in a bank then the bank will be doing these things on your behalf. When savings are lent to firms to finance productive investment then that increases the GDP and the capital stock of that country's economy. When the savings are invested in an asset then they don't, if that asset is unchanged.

This is a key argument around the whole "Washington Consensus" of institutions like the IMF and World Bank that say investment (in the sense of savings) should be free to be directed to the area with the highest expected returns. This makes sense from a free market position, but then the downside is you get situations like Ireland where large amounts of investment flow into the country but instead of financing productive investment from firms it was basically used to speculate on property, real estate etc, so when that bubble bursts the economy has little material benefit to show for it. In some of the East Asian economies during the 70s and 80s etc the government intervened in the market for savings and investment forcing it to be directed to areas designated as productive investment priorities, but then after the Asian financial crisis in the late 1990s the IMF forced them to follow the Washington Consensus model as a condition for IMF loans.