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Net Capital Outflow

Net Capital Outflow. NCO = S - Ig. The market for loanable funds, net capital outflow and the fx market for dollars. Real interest rate. S. D. NCO. Negative NCO. Positive NCO. Quantity of loanable funds. Real exchange rate. D. S. QUANTITY OF DOLLARS.

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Net Capital Outflow

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  1. Net Capital Outflow NCO = S - Ig

  2. The market for loanable funds, net capital outflowand the fx market for dollars Real interest rate S D NCO Negative NCO Positive NCO Quantity of loanable funds Real exchange rate D S QUANTITY OF DOLLARS

  3. A budget deficit will affect the market for loanable funds, net capital outflow and the fx market for dollars Real interest rate S D NCO Negative NCO Positive NCO Quantity of loanable funds Real exchange rate D S QUANTITY OF DOLLARS

  4. The gov’t deficit competes for savings available for loans, this can be seen as fewer private sector savings available for firm investment S1 Real interest rate S D NCO Negative NCO Positive NCO Quantity of loanable funds Real exchange rate The Market for Dollars D S QUANTITY OF DOLLARS

  5. Or, the Gov’t borrowing can be seen as an increase in demand for loans; producing a decrease in quantity supplied to the private sector. Real interest rate S D1 D NCO Negative NCO Positive NCO Quantity of loanable funds Real exchange rate The Market for Dollars D S QUANTITY OF DOLLARS

  6. Only the fx market for dollars is affected by a tariff or quota Real interest rate S D NCO Negative NCO Positive NCO Quantity of loanable funds Real exchange rate D1 D S QUANTITY OF DOLLARS

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