00:01
So here we've got an investment tax credit, right? if i start off by drawing sort of a market for loanable funds, which i think is how this net capital outflow story is usually told, right? what we have in terms of demand and supply is an increase in demand, right? people want to do more investment, right? we're going to have more investment demand.
00:26
And investment uses up funds, right? you need funds to do investment.
00:32
So with more investment demand, funds, or this bids up the interest rate, right? that's basically what that is happening.
00:43
Bids up the real rate.
00:47
Firms want to do more investment.
00:49
They need more funds.
00:51
They go looking for more funds.
00:52
They bid up the price of funds to a higher real rate.
00:56
How does that translate to net capital outflow? well, net capital outflow is just sort of a non -traditional way of talking about trade statistics, right? the idea here being that, look, we have more investment projects to do at home.
01:17
We have less money for foreign investment.
01:21
So net capital outflow is declining, right? we have all this demand for investment at home, which means we have less money.
01:31
To invest in other countries, right? because our sort of domestic market for loanable funds is sucking up more resources, right? companies were, say, using 80 % of our savings, now they're going to use more of our savings, so we have less money to send abroad.
01:46
In terms of the exchange rate, the key is that the exchange rate should depend, be related to the interest rate, right? when the interest rate goes up, it makes the interest rate rise is going to make our currency more appealing, right? you may have heard of sort of equilibrium concepts in the market for exchange.
02:16
Well, one of them is you want to hold currencies which pay higher interest rates, right? when the interest rate rises, more people want our currency.
02:25
See.
02:26
So we should expect to see actually the exchange rate increases, right? so this should go up as well, right? exchange rate should be increasing.
02:37
We want to do more investment.
02:39
We are driving up our real rate.
02:41
We are pushing the exchange rate up.
02:44
Exchange rate is going to rise, right? another way of looking at is like there's less supply of our dollars.
02:54
We are using our dollars at home.
02:56
We're not sending them abroad.
02:58
So there is less supply of our dollars on the world markets, which drives up the price, right? when i turn to the trade balance, right? the trade balance equals nx, right? but this is just equal to savings minus investment, right? that's what the whole idea is going on, that flows of funds haven't have to be balanced with flows of goods and services.
03:22
Investment is going up here, so the trade balance is going down, right? just like the that sort of mirrors what's happening in that capital outflow, right? we are sending less of our savings abroad.
03:37
So our trade balance is going down because the trade balance is the measure of how much sort of savings we're sending abroad, right? this is just basic gdp accounting...