Class Notes (810,969)
Canada (494,410)
Economics (1,611)
ECON 1BB3 (535)

Economics – March 5-15th Lecture Notes.docx

4 Pages
Unlock Document

McMaster University
Bridget O' Shaughnessy

Economics – March 5 , 2013th Why do some countries have trade deficits? Net Exports  Net exports (trade balance): exports – imports  Exports: goods/services produced domestically and sold abroad  Imports: goods/services 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) 5. Transportation costs 6. Government trade policies Net Capital Outflow  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” (NFI) What affects NCO?  Factors affecting the 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 decision making)  Foreign portfolio investment: an investment that is financed by a foreign entity, but operated by domestic residents Equality of NX and NCO  NCO = NX  Why? o When a firm sells a good to a foreigner, the firm receives a good or an asset or equal value in return o If NX changes, NCO must also change Saving and Investment in an Open Economy  Y = C + I + G + NX  Y – C – G = I + NX  Recall: Y – C – G = S  S = I + NX  S – I = NX  NCO = NX Economics – March 11 , 2013th What determines the value of the dollar? Exchange Rates  Nominal exchange rate: the rate at which you can exchange one currency for another  “e” – how much foreign currency you can purchase with 1 Canadian dollar  e goes up – Canadian dollar appreciates  e goes down – Canadian dollar depreciates  Real exchange rate: rate at which you can exchange goods and services between countries  RER = (nominal ER x domestic price)/foreign price = eP/P*  P*: foreign price (anything foreign will have a star) Ex. eP = (10pesos/$) x (4$/US bushel) pesos/$ x $/US bushel 20pesos/Mex. bushel pesos/Mex. bushel = (10x4)/20 = pesos x Mex. bushel =2 = 2 Mexican bushels per US bushels US bushel peso = Mex. bushel/US bushel How Are Exchange Rates Determined?  Purchasing-power parity (PPP): a unit of currency should buy the same quantity of goods in any country  1/P: quantity of goods a Canadian dollar buys in Canada  e/P*: quantity of goods a Canadian dollar buys in a foreign country  PPP says that 1/P = e/P*  Rearrange equation: eP/P* = 1  RER = 1  Arbitrage: taking advantage of different prices in different markets at the same time to make a profit (not the same as buying a stock hoping for a capital gain)  Ex. buy car cheaper in Hamilton and drive to Toronto to sell for greater price there  PPP tends to “work” (explain movements in nominal exchange rates) in the long run or in countries with very different price levels  Ex. PPP: if P goes up and eP/P*=1, what
More Less

Related notes for ECON 1BB3

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.