Question

Analyze the cases below via the Open Market Economy Analysis method:

-Case of a Capital Flight from Turkey to USA,

1) From Turkey's economy's point of view,

2) From USA's economy's point of view.

Answer 1

Capital flight is when money (other forms of capital) flow out of the country due to various reasons like political stability. In this case, we can understand it from both the countries perspective as it has a different impact on the affected country and the country to which capital flows.

1. From Turkey's (affected) economy's point of view

Capital flight might have many negative consequences on the affected country. One of the first consequences is that the strength of the economy as a whole reduces. The investments in both private and public sector will reduce which will have an impact on the output of the economy. Along with this there will be a fall in exchange rate of Turkey's currency which will ultimately have an impact on the imports as they will become very expensive. The investor confidence also gets eroded and the government will have to take measures otherwise the economy might enter a period of stagnation.

2. From USA's economy's point of view

Capital flight into USA will create many opportunities of growth for the economy. The increased capital will lead to an increase in the investment in private and public sectors along with an appreciation of the currency. This means that the country will experience a capital boom and an increase in the output.