Suppose there are two countries, America and Japan. Given:

MPK_America

r = 14? - (1/600)K_America

MPK_Japan

r_f= 12 - (1/600)K_Japan

K_World= K_America+ K_Japan= 10,000 units

FIGURE 21.1 Gains and Percent per year (for Percent Losses from rates of return, and MPK) per year Well-Behaved International Lending 8 A a R 2 MPK America g h MPK Japan 0 4,200 4,800 6,000 10,000 KJ = Capital in Japan -KA= Capital in America WJ = Japan's wealth KWA World capital = World wealth From no international lending (RS ) to free lending (T): Japan gains (a + b + c) =27 America gains (d + e + f ) = 27 World gains (a through f ) = 54 If Japan imposes a 2 percent per year tax on lending abroad (from Tto UV): Japan gains (e - b) = 9 America loses (d + e) = 15 World loses (b + d) = 6 If America imposes a 2 percent per year tax on borrowing abroad (from T to UV): Japan loses (b + c) = 15 America gains (c - d ) = 9 World loses (b + d ) = 6