Intermediate Macroeconomics 4/8: Saving, Investment, and the Current Account in the Open Economy

This model allows for international lending (a CA surplus) and borrowing (a CA deficit) through the free movement of capital. Here, the World interest rare rW can be higher or lower than a country's closed-economy equilibrium rate. Shifts in S or I in a small open economy can increase or decrease CA, while a large open economy has the potential to change rW as well.