Net capital outflow (NCO) is the net flow of funds being invested abroad by a country during a certain period of time (usually a year). A positive NCO means that the country invests outside more than the world invests in it. NCO is one of two major ways of characterizing the nature of a country's financial and economic interaction with the other parts of the world (the other being the

balance of trade The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...

Explanation

NCO is linked to the market for

loanable funds In economics, the loanable funds doctrine is a theory of the market interest rate. According to this approach, the interest rate is determined by the demand for and supply of loanable funds. The term ''loanable funds'' includes all forms of credit, ...

and the international

foreign exchange market The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...

. This relationship is often summarized by graphing the NCO curve with the quantity of country A's currency in the x-axis and the country's domestic real interest rate in the y-axis. The NCO curve gets a negative slope because an increased interest rate domestically means an incentive for savers to save more at home and less abroad. NCO also represents the quantity of country A's currency available on the

, and as such can be viewed as the supply-half that determines the real exchange rate, the demand-half being demand for A's currency in the foreign exchange market. As can be seen in the graph, NCO serves as the perfectly inelastic supply curve for this market. Thus, changes in the demand for A's currency (e.g. change from an increase in foreign demand for products made in country A) only cause changes in the exchange rate and not in the net amount of A's currency available for exchange. By an accounting identity, Country A's NCO is always equal to A's Net Exports, because the value of net exports is equal to the amount of capital spent abroad (i.e. outflow) for goods that are imported in A. It is also equal to the net amount of A's currency traded in the foreign exchange market over that time period. The value of exports (bananas, ice cream, clothing) produced in country A is always matched by the value of reciprocal payments of some asset (cash, stocks, real estate) made by buyers in other countries to the producers in country A. This value is also equal to the total amount of A's currency traded in the foreign exchange market over that year, because essentially the buyers in other countries trade in their assets (e.g. foreign currency) to convert to equivalent amount in A's currency, and use this amount to pay for A's export products.

References

* Mankiw, N. Gregory. ''Principles of Economics'', Third Edition. Thompson South-Western, 2004. Financial ratios Macroeconomic aggregates International macroeconomics Financial data analysis Economic data {{macroeconomics-stub