ECON103 Chapter Notes - Chapter ECON103: Loanable Funds, Real Interest Rate, Exchange Rate
Equilibrium in the Open Economy
ā¢ Net Capital Outflow: The Link between the Two Markets
o Four important macroeconomic variables: national saving (S), domestic investment
(I), net capital outflow (NCO), and net exports (NX).
S = I + NCO NCO = NX
o In the market for loanable funds, supply comes from national saving (S), demand
comes from domestic investment (I) and net capital outflow (NCO), and the real
interest rate balances supply and demand.
o In the market for foreign-currency exchange, supply comes from net capital outflow
(NCO), demand comes from net exports (NX), and the real exchange rate balances
supply and demand.
o Net capital outflow is the variable that links these two markets. In the market for
loanable funds, net capital outflow is a piece of demand. In the market for foreign-
currency exchange, net capital outflow is the source of supply.
o The key determinant of net capital outflow is the real interest rate.
o The net-capital-outflow curve is the link between the market for loanable funds and
the market for foreign currency exchange. Because a higher domestic real interest
rate makes domestic assets more attractive, it reduces net capital outflow. Net capital
outflow can be positive or negative. A negative value of net capital outflow means
that the economy is experiencing a net inflow of capital.
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Document Summary
Net capital outflow: the link between the two markets: four important macroeconomic variables: national saving (s), domestic investment (i), net capital outflow (nco), and net exports (nx). In the market for loanable funds, supply comes from national saving (s), demand comes from domestic investment (i) and net capital outflow (nco), and the real interest rate balances supply and demand. In the market for loanable funds, net capital outflow is a piece of demand. Because a higher domestic real interest rate makes domestic assets more attractive, it reduces net capital outflow. Net capital outflow can be positive or negative.
