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ECON 1BB3 Lecture Notes - Capital Outflow, Real Interest Rate, Automotive Products

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Bridget O' Shaughnessy

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Economics 1BB3 March 5th, 2013: (Start of Chapter 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 goods)
3. Exchange Rates
4. Income (Foreign/domestic goods)
5. Transportation Costs
6. Government trade policies
Question: Which industry is the largest in terms of Canadian exports?
a) Energy Products
b) Industrial goods and materials
c) Machinery and equipment
d) Automotive products
e) Agricultural products
Answer: C
Net Capital outflow
Net Capital Outflow (NCO): The purchase of the foreign assets by domestic
residents minus the purchase of domestic assets by foreign residents
-Net capital outflow is also called “net foreign investment” (NFI)
What affects Net Capital Outflow?
Factors affecting net capital outflow include:
1. Real interest rate on domestic/foreign assets
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
foreign entity -> Day-to-day control management decisions
Foreign portfolio investment: An investment that is financed by a foreign entity,
but operated by domestic residents.
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