Net capital outflow

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 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.

As can be seen in the graph, NCO serves as the perfectly inelastic supply curve for this market.

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 importance of NCO. The domestic real interest rate determined in the domestic market for loanable funds moves along the NCO curve to determine the quantity of currency available for foreign exchange. This in turn determines the real exchange rate .