Why does Canada have a trade surplus? (Ch 12)
Net exports (trade balance) – exports – imports
Exports – goods and services that are produced domestically and sold abroad
Imports – goods and services that are produced abroad and sold domestically
What affects the trade balance?
Factors affecting the trade balance
1) Tastes (foreign/domestic goods)
2) Prices (foreign/domestic)
3) Exchange rates
4) Income (foreign/domestic)
When income goes up, we buy more of everything including foreign goods.
Import goes up and NX goes down
Foreign consumption goes up
Export goes up, NX goes up
5) Transportation costs
6) Government trade policies
Net capital outflow (NCO) – the purchase of foreign assets by domestic residents minus
the purchase of domestic assets by foreign residents.
Net capital outflow is also called Net foreign investment
What affects NCO?
Factors affecting net capital outflow include
1) Real interest rate on domestic/foreign assets (bond)
2) Economic and political risk of holding assets abroad
3) Government policies affecting foreign ownership of domestic assets
Types of foreign investment
- Foreign direct investment – a capital investment that is owned and operated by a