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  1. TolerantLiberty

    Three reasons for a carry trade:
    1) Country has lower labor costs than the financing providing country. Borrowers want to profit with direct or portfolio investments.

    2) Households in the country reduce their savings rate,
    a) e.g. caused by a housing boom (US, Spain, Ireland) and the feeling to be richer.
    b) caused by lower borrowing rates (Eurozone, US) than previously
    Results –> companies profit on more spending, country becomes
    The carry trades collapse when
    A)  labor costs in the destination country rise too much compared to the other –> loss of competiteness
    B) or foreign financing costs rise too much. (often caused by rising labor costs in financing country).

  2. TolerantLiberty

    GNI = Local income + Foreign Income
    Net S = GNI – C- Inv
    Net S = GNI – C – Local Inv – Foreign Inv
    Need of Finance country: Net S < 0
    Financing Country: Net S > 0
    Depletion Country: Net S < 0 and C >>I
    Investment Country: Net S < 0 and Inv relatively high
    compared to C

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