Global loanable funds market

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Intros
Lessons
  1. How Global Loanable Funds Work
    • Goal of the Lender
    • Goal of the Borrower
    • Positive net exports \, \, Lending
    • Negative net exports \, \, Borrowing
  2. Demand & Supply for Global Loanable Funds
    • Sum of the demands of LF in all countries
    • Sum of the supply of LF in all countries
    • Intersection of DLFwDLF_{w} and SLFWSLF_{W}
    • World Equilibrium Interest Rate
  3. International Borrowers & Lenders
    • International Lenders \, \, Lend to the World
    • International Borrowers \, \, Borrow from the World
    • Excess of Supply Funds
    • Shortage of Supply Funds
Topic Notes
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How Global Loanable Funds Work

Since lenders and borrowers have the freedom to lend and borrow at any country, they both have objectives:

Goal of the Lender (Supplier): is to look for anywhere in the world that has the highest possible interest rate.

Goal of the Borrower (Demand): is to look for anywhere in the world that has the lowest possible interest rate

A country’s loanable funds is associated with the global loanable funds market through net exports.
  1. If a country’s net exports are positive (XX>MM), this means the country is lending to the rest of the world. The country supplies funds to the rest of the world that is less than their national savings.
  2. If a country’s net exports are negative (XX<NN), this means the country is borrowing from the rest of the world. The rest of the world supplies funds to the country, which is greater than their national savings.


Demand & Supply for Global Loanable Funds

Demand Curve for Global Loanable Funds: the sum of the demands of loanable funds in all countries, labelled as DLFwDLF_{w}.

Supply Curve for Global Loanable Funds: the sum of the supplies of loanable funds in all countries, labelled as SLFwSLF_{w}.

Global Loanable Funds Market


Note: The intersection of the two curves is where the demand and supply of loanable funds are the same and gives the world equilibrium interest rate.

International Borrowers & Lenders

International Lenders: Suppose a country’s net exports are positive (XX>MM), and SLFDSLF_{D} & DLFDLF are the supply and demand of loanable funds for the country.

Global Loanable Funds Market


If the country is isolated from the world, then the real interest rate would be 3% a year.

If the country is integrated into the global economy, then lenders would want to lend to the rest of the world, rather than their own country due to a higher interest rate. The country faces the supply curve SLFSLF, and the excess supply of loanable funds goes to other countries.

International Borrowers: Suppose a country’s net exports are negative (XX<MM), and SLFDSLF_{D} & DLFDLF are the supply and demand of loanable funds for the country.

Global Loanable Funds Market


If the country is isolated from the world, then the real interest rate would be 5% a year.

If the country is integrated into the global economy, then borrowers would want to borrow from the rest of the world, rather than their own country due to a lower interest rate. The country faces the supply curve SLFSLF, and the shortage supply of loanable funds is made up from borrowing from other countries.