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Unformatted text preview: CHAPTER 35 EXCHANGE RATES + THE BALANCE OF PAYMENTS 35.1 BALANCE OF PAYMENTS Balance of Payments = a summary record of a countrys transactions with the rest of the world, including the buying + selling of goods, services, and assets Actual transactions among Canadian firms, households &amp; governments, + those in the rest of the world are reported in the balance of payments accounts o In these accounts, any transaction that represents a receipt for Canada (Canadians sell goods or assets to foreigners) s recorded as a credit item o Any transaction that represents a payment from Canada (Canadian purchase goods or assets from foreigners) is recorded as a debit item Categories in the balance of payments accounts are the: o Trade account o Capital-service account = includes official financing account o Current account = trade account + capital service account CURRENT ACCOUNT (CA) Current Account = the part of the balance of payments accounts that records payments + receipts arising from trade in goods + services and from interest + dividends that are earned by capital owned in one country and investment in another Trade Account = in the balance of payments, this account records exports + imports of goods and services Capital-Service Account = in the balance of payments account, this account records the payments and receipts that represent income on assets (such as interest + dividends) CAPTIAL ACCOUNT (KA) Capital Account = the part of the balance of payments accounts that records payments and receipts arising from the import and export of long-term + short-term financial capital BALANCE OF PAYMENTS MUST BALANCE: Balance of Payments = CA + KA = 0 If all these transactions are recorded in the balance of payments, the sum of all credit items necessarily equals the sum of all debit items. Thus, the balance of payments must always balance A country with a current account deficit must also have a capital inflow = a capital account surplus o A deficit on the current account must be matched by an equal surplus in the capital account. A current account deficit = implies a net capital inflow balance of payments = 0 A country with a current account surplus must also have a capital output = a capital account deficit o Any surplus on the current account must be matched by an equal deficit on the capital account. A current account surplus = implies a capital outflow the balance of payments always = 0 A BALANCE OF PAYMENTS DEFICIT? Balance of Payments DEFICIT = refers to a situation in which the gvt is selling official foreign-currency reserves. Balance of Payments SURPLUS = refers to a situation in which the gvt is buying official foreign-currency reserves In both cases, the balance of payments is actually in balance SUMMARY: The current account shows all transactions in goods + services between Canada + the rest of the world (including investment income + transfers) The capital account shows all transactions in assets between Canada + the rest of the...
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- Spring '08