Econ356notecheatsheet

Econ356notecheatsheet - Econ356 Internal perspective of...

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Econ356 Internal perspective of exchange rate ----> US $1.00 = Can$1.2107 External Perspective of exchange rate---->Can$1.00= US$0.8260 Spot market - for foreign exchange involves the purchase and sale of foreign exchange for immediate delivery Forward market - delivery takes place at some specified time in the future e.g. 3 months, 1 year. Exchange rate system – 1 fixed exchange rate system 2 freely floating exchange rate system 3 intermediate system Transferring purchasing power through third currencies- so called vehicle currencies Supply and Demand forces in the Spot market, we turn first to the Balance of international payments The balance of international payment- record of all economic transactions between residents of Canada and residents of other countries, over a given period of time. - Can also be seen as record of sources and uses of purchasing power over foreign goods, services, and assets- financial and real –over a given period of time. Balanced of payment—1. Current account, 2 capital account and financial account 3 official monetary movements Current account- covers transactions involving purchase and sale of goods and services, plus some transfers Capital account and financial account covers changes in our holding of financial claims against foreigners and changes in foreigners holding of financial claims against Canadians. Capital Inflows arise when Canadians “borrow” from foreigners. It leads to an increase in the supply of foreign exchange in our market. Denote capital inflows by + in the accounts. Capital outflow arise when Canadian “lend” to foreigners. It leads to an increase in the demand of foreign exchange in our market. Denote capital outflows by – in the accounts. The balance of payments identity
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This note was uploaded on 11/29/2010 for the course ECON 356 at UBC.

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Econ356notecheatsheet - Econ356 Internal perspective of...

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