1
$\begingroup$

So, can it? The supposition is that this has been caused by an increase in domestic residents' marginal propensity to import.

My thought would have been: no, it cannot, but my answer seems too simple for me to believe it (it forms part of an assignment).

In the IS-LM-BP model I am considering,

$BOP=NX-NFI=0$

where NFI (net foreign investment) depends on the degree of capital mobility and foreign and domestic interest rates, and where NX (net exports) depends on foreign income, domestic income, the exchange rate, and foreigners' and domestic residents' marginal propensity to import.

But if there is zero perfect mobility, surely $NFI=0$, and, as a result, $NX=0$, too? Indeed, it hardly seems intuitive to me that there could be a current account deficit in this case, since the only way imports could be bought would be by exporting goods--hence meaning $NX=0$.

$\endgroup$
  • $\begingroup$ Any trade apart from barter or gifts involves a degree of capital mobility. I sell you something and deliver it, so you owe me money (creating an asset and liability, i.e. capital). $\endgroup$ – Henry May 1 '17 at 11:08
  • $\begingroup$ This was my sense of the answer, too...I can only suppose either the question is very simple, or the author meant "perfect capital mobility" rather than "perfect capital immobility"... $\endgroup$ – Chaerephon May 1 '17 at 12:45

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.