ECON282 Lecture Notes - Lecture 5: Exchange Rate, Capital Outflow, Foreign Direct Investment

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24 Jul 2016
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Chapter 5 Lecture notes – Global Financial System and Exchange Rates
Open Economy
How open is an economy? – add up all exports and imports and divide by GDP
- Canada’s manufactured goods are less competitive in the world market right now.
- China, Mexico etc. are exporting at cheaper prices
- Canada’s exports and imports have fallen so Canada is les globalized and less involved in
international trade since its peak in 2000.
- The US is not that globalized – it has a lot of customers at home and has a diversifies economy
producing many different things
- China peaked in 2006 and fell with the recession – hasn’t really gotten back up
- China is also becoming more diversified – selling within the country more
People getting pessimistic has huge implications in a recession
- As we get more connected globally – pessimism spreads – especially through social media
Balance of Payments Accounting
- To measure trade with other countries
- Money coming into Canada is (+)
- Money leaving is (-)
- Balance = 0
- Two accounts:
oCurrent Account
Net exports (exports – imports)
Most services exported and imported are financial, insurance related
Tourism – if someone from china comes to Canada, its Canadians
exporting a tourist service to china
Net factor payments (money Canadians get from foreign investments – money
foreigners get from Canadian investments)
Transfers and payments (like charities and stuff)
Current Account deficit: when a country spends more than it makes. Country is a net
borrower from foreign countries.
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Canada historically – current account surplus – but now not really – Canadians have
been importing more
China and Germany exports more than it imports
US – large current account deficits – it buys more abroad than it spends abroad
China – US lots of connection
China owns many savings in US, and US buys a lot of stuff from china
oFinancial Account
Trading of assets between countries
When Canada buys something abroad – A capital outflow
When a foreign investor buys a Canadian bond – A capital inflow
Net capital outflow = capital outflow – capital inflow
Capital includes land, labour, stocks etc.
Outflow is positive and inflow is negative
If a person buys an apartment in a foreign country – its recorded in the financial
account, and the rent he receives is part of the current account
Foreign Direct Investment – purchase or build physical capital goods abroad
Foreign Portfolio investment – Purchase a financial investment from a foreign country
Nominal exchange Rate – Canada’s currency in terms of another currency
If you want to buy a good from the US, you need to buy US dollars first
Crisis affects exchange rates
Multilateral Exchange Rate – value of Canada’s currency in terms of several other countries. We are
looking at a basket of currencies
- Multilateral rates are calculated with countries we have most trade with
Currency Appreciation - makes the price go up in value – more difficult to sell any asset – stocks, bonds,
labour, goods, etc.
- Appreciation is bad for exports but good for imports
- Depreciation – good for exports but bad for imports
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