Lecture 18 - ECO100 - CO 100Y CO 100Y ECO 100Y ECO 100Y...

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Unformatted text preview: CO 100Y CO 100Y ECO 100Y ECO 100Y troduction to troduction to Introduction to Introduction to conomics conomics Economics Economics Lecture 18: Lecture 18: The Exchange Rate and The Exchange Rate and e Balance of Payments e Balance of Payments Gustavo Indart Slide 1 the Balance of Payments the Balance of Payments Balance of Payments 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 three main accounts in the balance of payments: Current account erchandise account Merchandise account Service account Investment income Transfers (grants and gifts) Capital account i d l d i Borrowing and lending Capital investment Official financing account Gustavo Indart Slide 2 g Elimination of deficits or surpluses Canadas Balance of Payments, 2007 Canadas Balance of Payments, 2007 Receipt Payment Balance Current account 605,933 591,751 14,182 Goods and services 532,690 502,509 30,181 Investment income 63,679 79,358-15,679 f 564 884 Transfers 9,564 9,884-320 Capital account, net flow 4,280 Financial account, net flow-22,642 Statistical discrepancy 180 Gustavo Indart Slide 3 4,180 Foreign Exchange Rate Foreign Exchange Rate The foreign exchange rate (or the exchange rate ) is the value of one unit of foreign currency in terms of Canadian dollars ( e ) There is, therefore, one exchange rate for each currency in the world The value of the Canadian dollar in terms of a foreign currency is equal to the inverse of the exchange rate ( 1/e ) or example the at the For example, the exchange rate for the U.S. dollar is at the present time approximately 1.08 (that is, one U.S. dollar is exchanged for $1.08 Canadian dollars) Therefore, the value of the Canadian dollar in terms of U.S. dollars is 1/1.08 = 0.92 hat is, one Canadian dollar is exchanged for $ .92 .S. Gustavo Indart Slide 4 That is, one Canadian dollar is exchanged for $0.92 U.S. dollars Flexible and Fixed Exchange Flexible and Fixed Exchange Rate Systems Rate Systems There are 2 main systems determining the value of the exchange rate: Flexible exchange rate system Fixed exchange rate system he value of the Flexible exchange rate system The value of the exchange rate is determined by market forces, i.e., by the demand and supply of foreign exchange in the i h k t foreign exchange market Fixed exchange rate The value of the exchange rate Gustavo Indart Slide 5 is set by the Bank of Canada Supply of Foreign Currency Supply of Foreign Currency Since foreign currency (e.g., US$) is exchanged for anadian dollars, a supply of foreign currency (e.g., US$) Canadian dollars, a supply of foreign currency (e.g., US$) implies a demand for Canadian dollars That is, those who supply foreign currency (e.g., US$) are demanding Canadian currency in the exchange market The supply of foreign currency (e.g., US$) in the exchange market originates from:...
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This note was uploaded on 08/10/2010 for the course ECONOMICS ECO100Y taught by Professor Furlong during the Summer '09 term at University of Toronto- Toronto.

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Lecture 18 - ECO100 - CO 100Y CO 100Y ECO 100Y ECO 100Y...

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