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Principles of Economics- Mankiw (5th) 659

Principles of Economics- Mankiw (5th) 659 - CHAPTER 30 A...

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CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 681 To understand the market for loanable funds in an open economy, the place to start is the identity discussed in the preceding chapter: S I NFI Saving Domestic investment Net foreign investment. Whenever a nation saves a dollar of its income, it can use that dollar to finance the purchase of domestic capital or to finance the purchase of an asset abroad. The two sides of this identity represent the two sides of the market for loanable funds. The supply of loanable funds comes from national saving ( S ). The demand for loanable funds comes from domestic investment ( I ) and net foreign investment ( NFI ). Note that the purchase of a capital asset adds to the demand for loanable funds, regard- less of whether that asset is located at home or abroad. Because net foreign invest- ment can be either positive or negative, it can either add to or subtract from the demand for loanable funds that arises from domestic investment.
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