VI.B. - home are low(high relative to other countries Real interest rates are determined by the asset market equilibrium condition or in the

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VI. B. Explaining the Trade Balance Recall from our accounting identities (***) = that we can explain the trade balance by explaining when conditions cause an economy to become an international lender or borrower NX > 0 => > 0 (trade surplus => net international lender) NX < 0 => < 0 (trade deficit => net international borrower) 1. International Lending and Borrowing People with income to save will seek out the highest real rate of return An economy becomes a net lender (borrower) when real interest rates at
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Unformatted text preview: home are low (high) relative to other countries. Real interest rates are determined by the asset market equilibrium condition or in the Cobb-Douglas case So the MPK and r are high when (i) A is high (ii) k is low (say due to a low saving rate or high population growth) Net borrower => Trade/Current Account Deficit the MPK and r are low when (i) A is low (ii) k is high (say due to a high saving rate or low population growth) Net lender => Trade/Current Account Surplus...
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This note was uploaded on 02/19/2011 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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VI.B. - home are low(high relative to other countries Real interest rates are determined by the asset market equilibrium condition or in the

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