Lecture 18 - ECO100 - Introduction to Introduction...

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© Gustavo Indart Slide 1 ECO 100Y ECO 100Y Introduction to Introduction to Economics Economics Lecture 18: Lecture 18: The Exchange Rate and The Exchange Rate and the Balance of Payments the Balance of Payments
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© Gustavo Indart Slide 2 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 two main accounts in the balance of payments: ¾ Current account ² Merchandise account ² Service account ¾ Capital account
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© Gustavo Indart Slide 3 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) ¾ 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) ± For example, the exchange rate for the U.S. dollar is approximately 1.22 (that is, one U.S. dollar is exchanged for 1.22 Canadian dollars) ± Therefore, the value of the Canadian dollar in terms of U.S. dollars is 1/1.22 = 0.80 ¾ That is, one Canadian dollar is exchanged for 1.22 U.S. dollars
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© Gustavo Indart Slide 4 Flexible and Fixed Exchange Flexible and Fixed Exchange Rate Systems Rate Systems ± There are 2 main systems determining the value of the exchange rate: ¾ Flexible exchange rate system ¾ Fixed exchange rate system ± 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 foreign exchange market ± Fixed exchange rate – The value of the exchange rate is set by the Bank of Canada
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© Gustavo Indart Slide 5 Supply of Foreign Currency Supply of Foreign Currency ± Since foreign currency is exchanged for Canadian dollars, a supply of foreign currency implies a demand for Canadian dollars ¾ That is, those who supply foreign currency are demanding Canadian currency in the exchange market ± The supply of foreign currency in the exchange market originates from: ¾ Canadian exports of goods and services ¾ Capital inflows (e.g., foreign investment) ¾ Foreign visitors to Canada
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© Gustavo Indart Slide 6 Demand for Foreign Currency Demand for Foreign Currency ± Since foreign currency is exchanged for Canadian dollars, a demand for foreign currency implies a supply of Canadian dollars ¾ That is, those who demand foreign currency are supplying Canadian currency in the exchange market ± The demand for foreign currency in the exchange market originates from: ¾ Canadian imports of goods and services ¾ Capital outflows (e.g., Canadian investment abroad) ¾ Canadian visitors to other countries
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© Gustavo Indart Slide 7
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This note was uploaded on 01/16/2011 for the course ECO ECO100 taught by Professor Inheart during the Fall '09 term at University of Toronto.

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Lecture 18 - ECO100 - Introduction to Introduction...

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