ECN 204 Lecture Notes - Capital Flight, Import Quota, Loanable Funds
1 May 2012
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Document Summary
The previous chapter explained the basic concepts and vocabulary of the open economy: net exports (nx), net capital outflow (nco), and exchange rates. This chapter ties these concepts together into a theory of the open economy. We will use this theory to see how govt policies and various events affect the trade balance, exchange rate, and capital flows. We start with the loanable funds market . A dollar of saving can be used to: the purchase of domestic, the purchase of a foreign asset capital. So, demand for loanable funds = i + nco. Recall: s depends positively on the real interest rate, r, i depends negatively on r. How nco depends on the real interest rate. The real interest rate, r, is the real return on domestic assets. A fall in r makes domestic assets less attractive relative to foreign assets: canadians purchase more foreign assets, canadians purchase fewer domestic assets, nco rises.
