There are two countries in the whole world: Bolivia and Peru.
The aggregated investements in Bolivia is $I^B$ And in Peru they are $I^P$ (They are both exogenous).
The savings for Bolivia, where $B,b > 0$, are representet by: $S^B=B+br$
And for Peru the savings are denoted by $S^P$ (Which is Also exogenous).
I want to find the equilibrium interest rate.
I know that you typically Can find the equilibrium interest rate by setting I (the investments) equal to S (the savings), so $S=I$.
But I am unsure of how to do it when I have to countries, how would i do this?
$\begingroup$
$\endgroup$
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
Assuming that capital can flow freely, that is, there is one interest rate for the two countries, the answer is that savings = investment in the aggregate, and savings in oune country might go to investment in another. We are given that $I^B,I^P,S^P$ are exogenous, so for the two countries, $$I^B+I^P=S^P+B+br.$$ or $$I^B+I^P-S^P-B=br$$ meaning the equilibrium interest rate is $$r=\frac{I^B+I^P-S^P-B}{b}.$$
