ECO100Y1 Study Guide - Foreign Exchange Market, The Foreign Exchange, Canadian Dollar

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11 Aug 2013
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The exchange rate and the balance of payments. The balance of payments shows the record of all transactions of residents of canada with the rest of the world. There are 3 main accounts in the balance of payments: current account. Merchandise account, service account, investment income, transfers: capital account. Borrowing and lending, capital investment: official financing account. The foreign exchange rate is the value of 1 unit of foreign currency in terms of canadian dollars (e). The value of the canadian dollar in terms of a foreign currency is equal to the inverse of the exchange rate (1/e). Example: the exchange rate for the us dollar is approximately 0. 98. that is, one us dollar is exchanged for sh. 98 canadian dollars. Therefore, the value of the canadian dollar in terms of the us dollar is 1/0. 98 = 1. 02. Since foreign currency is exchanged for canadian dollars, a supply of foreign currency in the exchange market implies a demand for canadian dollars.

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