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ECON 203 Final Review

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ECON 203
Michael Zekulin

Econ 203 Final Review Post Midterm Final LectureBalance of Payments BoP sum of all transactions that take place between a countrys residents and the residents of all foreign nationsCredits cash inflows Imports create credits CDIO ALPHABETICALDebits cash outflowsExports create debitsOverall BoP always0Current Account CUR reflects payments arising from trade in goods and services and income flows due to foreign investmentBalance of Trade BoT Merchandise Account value of exported goods minus value of imported goodsoExports importsBoT SURPLUSoImportsExports BoT DEFICITBalance on Services BoS value of exported services minus value of imported services Includes travel transportation business services etc Significant growth in international trade in business servicesNet Foreign Investment Income NFII returns on investment to residents of country X due to investment abroad minus returns of investment to foreigners due to investment in country XoFII inflows CreditsFII outflows DebitsCUR BOTBOS NFII0 CUR SURPLUS0 CUR DEFICITCapital Account CAP payments arising from nonresident purchases of assets CAP STCFLTCFoPurchases of foreign assets by a countrys residents debit outflowoPurchases of domestic assets by foreigners credit inflowShort Term Capital Flows STCF highly liquid assets volatile sensitive to short term interest changesLong Term Capital Flows LTCF more permanent investmentsoDirect Investment changes in nonresident ownership of domestic and foreign firmsoPortfolio Investment minority holdings of shares longer term bondsoCAP0 SURPLUSCAP0 DEFICITChanges in Official International Reserves OiR holdings of foreign currencies or historically precious metals by central banks Very Important in fixed exchange rate systemOverall Balance of Payments BoP0 CURCAPOiRoCURCAP0 BoP SURPLUS0 BoP DEFICITAdjustments to BoP surplusesdeficitsoFixed exchange rate system OiR changes continual BoP deficits unsustainableoBoP Surplus Gain OiRBoP Deficit Lose OiRFlexible Exchange Rate System in a truly flexible system changes in OiR0oBoP Surplus currency gains value APPRECIATESoBoP Deficit currency loses value DEPRECIATESoCUR CURPLUS CAP DEFICITCUR DEFICITCAP SURPLUS not necessarily goodbadThe Currency MarketoSupply of Cdn Canadians wanting to buy foreign stuff travel or invest abroadoDemand for Cdn Foreigners wanting to buy Cdn stuff travel invest in CanadaChanges in Exchange Rates XRoExport demand increases ex International demand for Canadian increases demand curveCdn AppreciatesoImport Demand increases ex Canadian Demand for US goods increases supply curveCdn DepreciatesoLong Term excess of Exports over Imports currency AppreciationPurchasing Power Parity XRs adjust to reflect price level differences between countriesoChanges in relative interest rates ex change r CDN0 change r US 1Demand shiftsSupply shifts CDN DEPRECIATES
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