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Chapter 12 Notes FULL lecture notes for Chapter 12

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University of Waterloo
ECON 102
Angela Trimarchi

Econ 102 Chapter 12 NotesProf Angela TrimarchiChapter 12Balance of Payments AccountingRecords economic transactions between oResidents of one country and Residents of the rest of the world ROW During a given period of timeBalance of Payments AccountingTransactions include Sale and purchase of oGoodsoServices oand AssetsTwo Main Accounts in Balance of Payments Account1 Current AccountRecords payments and receipts arising fromTrade in goods and services oTrade account XMInvestment income oCapital service accountTransfersTrade AccountCanadian imports of goods and services are recorded as debit items in the trade accountCanadian exports of goods and services are recorded as credit items in the trade accounthttpwww40statcancal01cst01econ01ahtmsdibalance20paymentsTrade AccountDebit and Credit ItemsDebit item is also called a paymentCredit item is also called a receiptCurrent Account BalanceCA Current ac receiptscurrent ac payments ReceiptsPayments relating tooTrade in goods and servicesoInvestment incomeacmeans account2 Capital AccountRecords flow of funds into Canada as foreignerspurchase Canadian assetsRecords flow of funds out of Canada as Canadians purchase foreign assetsEcon 102 Chapter 12 NotesProf Angela TrimarchiCapital Account Balance KAEquals capital inflows minus capital outflowsDO NOT WORRY ABOUT NET CAPITAL OUTFLOW NCO IN TEXTBOOKCapital Inflow Financial capital is entering Canada from abroad Occurs when Canadians sell domestic assets to foreigners Capital OutflowFinancial capital is leaving Canada and going abroadOccurs when Canadians purchase foreign assets from foreignersCapital account also distinguishes betweenDirect investment Portfolio investment 3 Official Reserve Assets Official Settlements AccountRepresents transactions in the official reserves that are held by the central bankOfficial reserves are listed under Canadian assets in the capital accountOfficial reserves represent a countrys holding of foreign reservesIf the Bank of Canada wants to increase its holdings of reserve assets it will sell dollars to buy foreign assets debit itemIf the Bank of Canada wants to decrease its holdings of reserve assets it will sell foreign assets to buy dollars credit itemExampleSuppose WalMart decides to buy more toys from ChinaSpending money on the toys increases the current account deficit of CanadaToy makers in China receive the money and must do something with itThey could do one of three thingsTake the money and use it to buy Canadian tractors so the current account is back in balanceThey could take the money and invest it back in Canada say by buying stocks this will cause the Canadian capital account surplus to rise by an equivalent amountThey could keep the money in a Chinese bank and this will cause a decrease in Canadian reserves to offset the current account deficitCanada is often referred to asA small open economyForeign Exchange Market
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