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Chapter Lecture 20-22

ECON102 Chapter Notes - Chapter Lecture 20-22: Canadian Dollar, Money Supply, Capital AccountPremium


Department
Economics
Course Code
ECON102
Professor
All
Chapter
Lecture 20-22

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University of Alberta
ECON102
Introduction to Macroeconomics
Winter 2018
Lecture 20-22
Prof: Mesbah Sharaf
Lecture Notes

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Chapter 15: International Finance
Balance of payments
Exchange rates
Types of exc2hange rate systems
Balance of Payments
oAny country that trades with others has a balance of payments
oRecord that summarizes all international transactions of a country with the rest of the
world during a certain period
Components of Balance of Payments
oExports of goods
Two sides to the balance of payments: Debit and Credit
oCredit: Any transaction that brings money into the country
oDebit: Any transaction that takes money out of the country
oExports bring money into Canada and therefore is a credit
oImports take money out of the country and therefore is a debit
oThe balance between exports and imports is Trade Balance Exports Imports
oTrade Balance + Exports Imports + Net Transfers (grants and aids)
oNet transfers have inflows of transfers outflows of transfers
oOutflow is in the debit side
oInflow is in the credit side
oNet Investment income inflow of investment income-outflow of investment income
oONLY a few countries have “current account” surplus.
Current Account: is a record of Net Exports of goods and services and net transfers
and net investment income
Capital Account: records flow of capital like investments and borrowings
Divert investments: making a project
Indirect investment or portfolio investments: investing I the stock market
Ex: did a project in the states, the money is flowing out of Canada and this is
an outflew, It is recorded in the capital account and recorded in the debit
account
In borrowing, you have to pay back and net transfers (grants and aids) do
not have to be paid back.
Capital account is when there is an inflow of money and is recorded in the
credit side
International Reserve Account
oAlso called the settlement account
oHoldings of gold and foreign currencies by the Central Bank of the country
oThis account is used to settle balance the other two accounts so as the balance of payment
has to be zero “balanced”.

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Example: Suppose the current account is -50. Because it is negative sign in front of the number, there is a
deficit. And capital account is 10 (more credit than the debit so more money comes into the country
then going out of the country). Overall, -40 (deficit of 40).
Answer: To finance this deficit, the Central bank of this country pays from his international reserves
account.
NOTICE:
1. Grants and aids are recorded in the current account, but loans are recorded in the capital
account.
2. Investment (either direct or indirect) is recorded in the capital amount
3. Investment income is recorded in the current account
4. Any transaction that takes money out is debit
5. Any transaction that brings money in is credit
Exchange Rate
Price or cost of one unit of the foreign currency
In other words, how many CAD$ (our currency) needed to buy foreign currency.
For example, one Euro costs 1.6 CAD dollars (in other words, we need $1.60 to buy 1 Euro).
What if: instead of requiring $1.60, you need $3 CAD to get 1 Euro. What has happened?
o There is an increase in the exchange rate, there is an increase in the price of foreign
currency
o Canadian dollars become weaker (Canadian dollar depreciates)
What if: instead of requiring $1.60, you need $0.5 to get 1 Euro. What happened?
o There is a decrease in the exchange rate, there is a decrease in the price of foreign
currency
o Canadian dollar gets stronger (appreciates).
Demand on foreign currency is a derived demand
o We demand a foreign currency because we want to use it to import or invest abroad.
Supply of a foreign currency reflects our exports
o In other words, we sell our goods and services to others and get their currency in return.
Factors impacting Exchange Rate:
How the exchange rate market determines he exchange rate
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