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A TREATISE ON MONEY

BK. IV

(The reader should remember that this does not mean,unless there is complete mobility of internationallending, that the rate of interest is the same in bothcountries. But if there is equality between themarket-rate and the international-rate in one of thecountries, then—when there are only two countries inquestion—there must necessarily be equality betweenthe market-rate and the international-rate in the othercountry also.)

Let us then suppose that the attractions of invest-ment increase in country A but not in country B.Two questions now arise for discussion—the character-istics of the new position of equilibrium when it hasbeen reached, and the nature of the transition fromthe old position of equilibrium to the new. (It willsimplify the exposition, without altering the essence ofthe argument, if we assume that the rise which takesplace in the market-rate of interest does not materiallyaffect the rate of saving in either country.)

1. First, the Characteristics of the New Position ofEquilibrium .—In each country the market-rate, theinternational-rate, and the natural-rate will have re-turned to equality with one another, but at a some-what higher level than before, corresponding to theincreased marginal attractiveness of investment in thetwo countries taken together—and a level, moreover,which is higher in B and lower in A than if there wasno mobility of international lending; and B and L willbe again equal, but with higher values than before.In other words, there will be a displacement of in-vestment, which was previously taking place in B, infavour of increased investment in country A. Whatwill be the effect of this displacement on the levels ofmoney-earnings in the two countries %

There will have to be a change-over on the partof the factors of production, which were previouslyproducing new investments in country B, to producesomething else which is calculated to facilitate new