Bad, bad Mankiw…

I’m teaching using Mankiw’s Macroeconomics 8th edition and on page 138, Chapter 6, he uses an example to illustrate and develop intuition of what is always a problem for students, that capital flows have to equal current account (NX = S – I).  The trouble is, in his example Mankiw writes as if an exporter who obtains currency represents one capital outflow and then when she trades yen currency for yen stocks or bonds is another capital outflow.  But that is just transforming the financial asset… the outflow happened already with the obtaining of currency.  Students might be terribly confused.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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