Net Capital Outflow
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Net Capital Outflow (NCO) is one of two major methods of determining the nature of a country's foreign trade (the other being the current account balance). NCO is the quantity of foreign assets held by residents of a given country minus the quantity of domestic assets in that country held by foreigners. A positive NCO means that the nation invests outside more than the world invests in it; a negative one, that the world invests in the country more than the country invests in the world.
It is linked to the market for loanable funds and the international currency exchange market in that, when graphed, the x-axis NCO is the quantity of the country's currency and the y-axis is the country's domestic real interest rate; the NCO graph has a negative slope as an increased interest rate domestically is an incentive for savers to do so at home rather than abroad.
This linkage partly determines the real exchange rate for that country's currency because one of the two determining variables of that market is the quantity of that country's currency available on the foreign exchange market--essentially, Net Capital Outflow (i.e. it is the x-axis in that market's graph). NCO serves as a perfectly inelastic supply curve for this market; thus changes in the demand for that country's currency (e.g. an increase in demand for products made in that nation) can only cause changes in the exchange rate.
NCO is always equal to Net Exports by an accounting identity, due to exports produced in one country being matched by reciprocal payments of some asset from a receiving second country.
[edit] References
Mankiw, N. Gregory. Principles of Economics, Third Edition. Thompson South-Western, 2004. ISBN 0-324-26938-2
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