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We assume that we have two and only two contries: Albania and Bulgaria. There is complete free trade between the two countries.

The aggregate investments in Albania are given by: $$I^A=A-ar$$ where $A, a >0$ and r real interest rates.

The aggregate investments in Bulgaria are given by: $$I^B=B-br$$ where $B, b >0$ and r real interest rates.

They have total savings $S^A$ and $S^B$ who are independent of the interest rate.

Now I have to derive the condition that Albania is a net exporter.

My though so far is that I have to use that BNP(Y): $$Y=C+I+G+NX$$ and $$S_A=publicsavings+privatesavnings=(T-G)+(Y-T-C)=Y-C-G$$ and that $NX>0$. But when I use these can only find an expression of the form $S_A>f(A,a,r)$. But I think I have to find an expression of the form $S_A>f(A,a,B,b,r)$. Can someone help me?

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  • $\begingroup$ Question: Is total savings defined as S = Y - C - G ? $\endgroup$ – Daniel Jan 12 at 5:41
  • $\begingroup$ Yes spot on. While we have that $S_A=publicsavings+privatesavning=(T-G)+(Y-T-C)=Y-C-G$. But when I use this I also just get an expression of the form $𝑆_𝐴>𝑓(𝐴,π‘Ž,π‘Ÿ)$. Can you help me to find the right expression? $\endgroup$ – Lifeni Jan 12 at 9:37
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So we have $$S^A = I^A + NX^A $$ $$S^B = I^B + NX^B $$ where $S^A$ and $S^B$ are exogenous constants. And since there are only two countries we have $$NX^A = -NX^B $$ which leads to $$S^A - I^A = -( S^B - I^B ) $$ Use that last equation to solve for r (after plugging in the I formulas). Then solve the first equation and require that $NX^A$ be positive.

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  • $\begingroup$ Nice. Thank you that makes sense. So when I have found r I just plug the expression for r in, in: $$NX^A>0 \Leftrightarrow S^A-I^A>0 \Leftrightarrow S^A>I^A=A-ar$$. And then I have found the condition that Albania is a net exporter? $\endgroup$ – Lifeni Jan 12 at 17:19

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