Consider the following simplified GNP equation: Y = C + I + CA where C, I, and CA denote domestic consumption, domestic investments, and the current account

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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?