Financial investment in the composition of GDP

In the production function Y = C + I + G + NX

Does foreign investment in domestic assets (i.e. foreign buying of domestic bonds) - and vice versa - come under the Net Exports variable? Which denotation does domestic investment in domestic assets come under? The Investment variable (I), one would think, however I seem to recall being told that the Investment variable does not include financial investment, so does it come under saving?

1 Answer

What you're describing is a change in the capital account, not in GDP. They're related through the balance of payments, in that if a country is running a current account deficit (usually arising through being a net importer), they'll have a capital account surplus (i.e., foreigners will on net buy more domestic assets or domestic owners will be net sellers of foreign assets, or both), and vice-versa. So if you take foreign investment in domestic assets for example, it'll be associated with being a net importer, but it does not appear directly in the national accounting identity $Y=C+I+G+NX$.

• Would purchases of new stock/bond issues come under consumption then? The fact that they are considered a form of investment or saving does not matter in an economic sense, it is simply viewed as a good (and like most goods, they can be resold)? – Harkell Apr 13 '15 at 22:26
• No, they wouldn't be counted as consumption. They're not goods, they're financial assets (they're a claim to a stream of income). The fact that they're new issue securities is beside the point; given that existing debt securities are repaid over time, we'd expect that people would have to be constantly purchasing new issue securities even to maintain zero net saving in a closed economy. – dismalscience Apr 13 '15 at 22:31
• Ok, thankyou for clearing that up for me. – Harkell Apr 13 '15 at 23:38