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Economics: Net Exports = Net Foreign Investment

Posted on 2004-08-16
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This is a question regarding economics...

There is a fundamental identity that states NX = NFI. It makes sense if derived mathematically, but someone asked me to explain it logically, and I wasn't able to.
I mean, if I export something, what the identity implies is that I'm investing abroad. How does this work exactly (as in a practical explanation).
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Question by:carlos_jjang
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by:PointyEars
PointyEars earned 200 total points
ID: 11816387
http://www.swcollege.com/econ/mankiw1e/cdrom/ch30/notes.html
and look for "NFI = NX"

It should help.
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grg99 earned 300 total points
ID: 11816757
I think what it means is if you export item A to country B, you get Y dollars in B's currency.  The ONLY thing you can do with their currency (directly, or thru intermediaries), is buy something from country B for $Y of their money.  Even if you exchange their currency for your own, the money-changer now is in the same boat.  



 
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by:aburr
ID: 11817751
Clearly, If you send money abroad you are (or should) be investing it. If you send goods abroad that is the same as sending money (the cost of the good). When the receipient pays for the goods, that is another, separate transaction.
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by:carlos_jjang
ID: 11821311
I wasn't thinking along the lines of money as a financial asset (yes I know it sounds stupid now). Of course it makes sense, thanks!
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