CHAPTER 30A MACROECONOMIC THEORY OF THE OPEN ECONOMY681To understand the market for loanable funds in an open economy, the place tostart is the identity discussed in the preceding chapter:SINFISavingDomestic investmentNet foreign investment.Whenever a nation saves a dollar of its income, it can use that dollar to finance thepurchase of domestic capital or to finance the purchase of an asset abroad. The twosides of this identity represent the two sides of the market for loanable funds. Thesupply of loanable funds comes from national saving (S). The demand for loanablefunds comes from domestic investment (I) and net foreign investment (NFI). Notethat 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 thedemand for loanable funds that arises from domestic investment.
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