chp 32

Chapter 32 is a continuation of chapter 31 and goes over a macroeconomic theory of the open economy. To understand the forces at work in an open economy the supply and demand of two markets have to be focused on, the supply and demand in the market for loanable funds  (which coordinates the economy's saving, investment, and the flow of loanable funds abroad (a.k.a net capital outflow)) and the supply and demand for foreign-currency exchange (which coordinates people who want to exchange the domestic currency for the currency of other countries). 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 supply of loanable funds come from national saving (S), and the demand for loanable funds comes from domestic investment (I) and net capital outflow (NCO). Loanable funds should be interpreted as the domestically generated flow of resources available for capital accumulation. The purchase of capital assets adds to the demand for loanable funds, regardless of whether that asset is located at home (I) or abroad (NCO). When NCO> 0 the country is experiencing a net outflow of capital; the net purchase of capital overseas adds to the demand for domestically generated loanable funds.