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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.
    Dobb-Douglas

    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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