Consider the following simplified GNP equation:

Y = C + I + CA

where C, I, and CA denote domestic consumption, domestic investments, and the current account.

 

Using this condition and the definition of domestic savings, show that domestic savings go towards uses in open economies: domestic investment and foreign credit.

If Hong Kong residents decide to invest in U.S. real estate instead of investing domestically, how does the Hong Kong current account respond? How does the U.S. current account respond? If the U.S. current account was balanced initially (i.e., equal to zero), would the U.S. become a net borrower or a net lender?

The US becomes a net lender

Step-by-step explanation

1. Gross National Product is the sum of consumption plus investment plus domestic consumption. Gross National Product also includes domestic saving. Domestic saving leads for capital accumulation and thereby leads to domestic investment.

2. If Hong Kong residents decide to invest in US real estate, instead of investing domestically, it will make a deficit in current account of Hong Kong.

Current account includes purchasing of domestic good and services by foreigners and purchase of foreign goods and services by domestic people.  

Purchasing of domestic good and services by foreigners make a surplus in current account

Purchase of foreign goods and services by domestic people makes deficit in current account

Here Hong Kong residents invest in real estate in US. It makes deficit in current account of Hong Kong and surplus in current account of US.

If the US current account was balanced initially, the US become a net lender