Class Notes (1,100,000)
CA (650,000)
UW (20,000)
ECON (1,000)
ECON102 (300)
Lecture

Chapter 12 Notes FULL lecture notes for Chapter 12


Department
Economics
Course Code
ECON102
Professor
Angela Trimarchi

This preview shows pages 1-3. to view the full 12 pages of the document.
Econ 102 Chapter 12 Notes Prof: Angela Trimarchi
Chapter 12
Balance of Payments Accounting
Records economic transactions between:
oResidents of one country and Residents of the rest of the world
(ROW) During a given period of time
Balance of Payments Accounting
Transactions include:
Sale and purchase of:
oGoods
oServices
oand Assets
Two Main Accounts in Balance of Payments Account
1. Current Account
Records payments and receipts arising from:
Trade in goods and services
oTrade account (X-M)
Investment income
oCapital service account
Transfers
Trade Account
Canadian imports of goods and services are
recorded as debit items in the trade account
Canadian exports of goods and services are
recorded as credit items in the trade account
http://www40.statcan.ca/l01/cst01/econ01a.htm?sdi=balance%20payments
Trade Account – Debit and Credit Items
Debit item is also called a payment
Credit item is also called a receipt
Current Account Balance – CA
= Current a/c receipts – current a/c payments
= (Receipts – Payments) relating to:
oTrade in goods and services
oInvestment income
a/c – means account
2. Capital Account
Records flow of funds into Canada as
foreigners purchase Canadian assets
Records flow of funds out of Canada as
Canadians purchase foreign assets

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Econ 102 Chapter 12 Notes Prof: Angela Trimarchi
Capital Account Balance (KA)
Equals capital inflows minus capital outflows
DO NOT WORRY ABOUT NET CAPITAL OUTFLOW (NCO) IN TEXTBOOK!!!
Capital Inflow
Financial capital is entering Canada from abroad
Occurs when Canadians sell domestic assets to foreigners
Capital Outflow
Financial capital is leaving Canada and going abroad
Occurs when Canadians purchase foreign assets from foreigners
Capital account also distinguishes between:
Direct investment
Portfolio investment
3. Official Reserve Assets (Official Settlements Account)
Represents transactions in the official reserves that are held by the
central bank
Official reserves are listed under Canadian assets in the capital
account
Official reserves represent a country’s holding of foreign reserves
If the Bank of Canada wants to increase its holdings of reserve assets
it will sell dollars to buy foreign assets (debit item)
If the Bank of Canada wants to decrease its holdings of reserve assets
it will sell foreign assets to buy dollars (credit item)
Example:
Suppose Wal-Mart decides to buy more toys from China
Spending money on the toys increases the current account deficit of
Canada
Toy makers in China receive the money and must do something with
it
They could do one of three things:
Take the money and use it to buy Canadian tractors, so the current
account is back in balance
They 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 amount
They could keep the money in a Chinese bank and this will cause a
decrease in Canadian reserves to offset the current account deficit
Canada is often referred to as:
A small open economy
Foreign Exchange Market

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Econ 102 Chapter 12 Notes Prof: Angela Trimarchi
Nominal Exchange Rate (enom)
Number of units of foreign currency that can be purchased with 1 unit
of domestic currency
Three Exchange Rate Systems
Fixed
Flexible
Managed Float
Appreciation
The exchange rate changes, so that a dollar buys more foreign
currency
Depreciation
The exchange rate changes, so that a dollar buys less foreign
currency
Diagram 1:
Equilibrium in the Foreign Exchange Market
S – Supply of Canadian Dollars
D – Demand for Canadian Dollars
FXR
S
D
Quantity of
Canadian Dollars
E0
Q*
FXR0
FXR1
You're Reading a Preview

Unlock to view full version