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ECN 220 (11)
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ECN 220
Ron Babin

Nominal is not adjusted for anything and is per year Real gdp is adjusted for the change in monetary value Current account consist of goods and services, investment income and transfers The current account balance is the different between total receipts and payments for current account items If receipts exceed payments there is a surplus If vice versa there is a deficit on current account Capital account includes only a few minor transactions All other transactions involving financial capital are included under the financial account It is a theory that links a nation’s current account balance and its government budget balance If foreigners' savings pay for the budget deficit, the current account deficit grows. If the countries own citizens' savings finance the borrowing, it may cause a crowding out effect (in an economy at or near potential output, or full employment). • Proof is YN= C + I + G + CA = C + SP+ T • Rearranging terms and eliminating C, we get • SP+ (T –G) = I + CA The budgeting defit could be financed through and increase in the private saving A decrease in domestic investment (the crowding out effect A decrease in CA which means an increase in the financial account Current account defict may be a problem because countries in a pioneer stage usuallay have a current account defict and a financial account surplus This will allow the obtain a higher rae of investment and a higher rate of economic growth For high income countries a current account defict may reflect a low propensity to save and make the country too dependent on forien capital inflows We can eliminate this with the expenditure swithing which is exchange rate cahnges or tariffs or we can use expenditure reducing hich is higher tazes and speding cuts There are three main types of capital flows foreign direct investment (FDI) this implies control and long term commitment Protfolio investment which is purely financial and very volatile And cahanges in offical reserve assets this shows changes in offical holding of financial astes expecially offical reserves Offical reserves which are bought and sold by the central bank consist mostly of foreign currencies The benefits of forgeign invest is supplemtns domestic saving and if it is direct foreign investment (DFI) it may promote the transer of technology beween countries The cost are that DFI may lead to a reduction in national inderdepence and portfolio investment increases the danger of a finanical crisis Reason to hold foreign currencies are for trade and investement, interst rate arbitrage and speculation The demand for dollars will be greater with the more a country exports goods If the dollar value of a good is cheaper in another country it is more desirable The lower the price of the dollar the larger then dollar demand is in the foreign exchange market The supply of dollars will be greater the larger the quantity of goods Canada imports Increase in canadian investment would increase the supply of dollars Increase british investment in canada would increase the demand for dollars Covered interest rate arbitrage Inrest rate involves taking advantage of international differentials in interest rates shifiting between currencies involes the risk
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