09_Lecture_Slides_Part_1_with_Graphs

09_Lecture_Slides_Part_1_with_Graphs - Economics 104 Fall...

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Unformatted text preview: Economics 104 Fall 2010 1 The Open Economy Readings — Chapter 12 (and parts of chapter 17) Outline 1. The balance of payments 2. Exchange rates: definitions and measures 3. Flexible exchange rates 4. Fixed exchange rates 5. Fixed versus flexible exchange rates Economics 104 Fall 2010 2 1. The Balance of Payments ◦ Economies can trade goods and assets with the rest of the world. ◦ The Balance of Payments keeps track of an economy’s transactions with the rest of the world. ◦ Two important broad components: i) Current Account, denoted CA Measures trade in goods and services and payments from abroad: CA = net exports (exports less imports, goods and services) + net international investment income ii) Capital Account, KI Measures trade in assets, net capital inflow : KI = sale of domestically owned assets to foreigners, capital inflow- purchase of foreign owned assets by domestic residents, capital outflow Assets can be domestic assets; e.g. Gov’t of Canada bonds, shares in Canadian firms. Assets can be foreign assets; e.g. US Gov’t bonds, shares in US firms. ◦ By definition, the balance of payments is zero: CA + KI = 0 Canadian Current Account and Net Exports as a Share of GNP (Source: Statstics Canada) -10%-5% 0% 5% 10% 15% 20% 1 9 2 7 1 9 3 1 9 3 3 1 9 3 6 1 9 3 9 1 9 4 2 1 9 4 5 1 9 4 8 1 9 5 1 1 9 5 4 1 9 5 7 1 9 6 1 9 6 3 1 9 6 6 1 9 6 9 1 9 7 2 1 9 7 5 1 9 7 8 1 9 8 1 1 9 8 4 1 9 8 7 1 9 9 1 9 9 3 1 9 9 6 1 9 9 9 2 2 2 5 2 8 Date Percent of GNP Economics 104 Fall 2010 3 Confusing terminology: ◦ In the national accounts (i.e. Statistics Canada), the capital account is now referred to as the Financial Account . ◦ In some circumstances, it is common usage to refer to Balance of Payments deficits or surpluses. Key — separating private sector capital account from government purchases and sales of inter- national reserves. International Reserves : foreign currency assets held by governments (or central banks). – Balance of payments deficit: . net decline in international reserves, that is, . a net sale of foreign assets (capital inflow) by government – Balance of payments surplus: . net increase in international reserves, that is, . a net purchase of foreign assets (capital outflow) by government Strictly, these are part of KI but it is common to separate them out: CA + KI PrivateSector = Δ International Reserves Canadian Financial Account (Source: Statstics Canada)-0.08-0.06-0.04-0.02 0.00 0.02 0.04 0.06 0.08 1 9 2 7 1 9 3 1 9 3 3 1 9 3 6 1 9 3 9 1 9 4 2 1 9 4 5 1 9 4 8 1 9 5 1 1 9 5 4 1 9 5 7 1 9 6 1 9 6 3 1 9 6 6 1 9 6 9 1 9 7 2 1 9 7 5 1 9 7 8 1 9 8 1 1 9 8 4 1 9 8 7 1 9 9 1 9 9 3 1 9 9 6 1 9 9 9 2 2 2 5 2 8 Date Share of GNP Net In¡ow of Capital from Abroad - Canada "borrowing" Net Out¡ow of Capital - Canada "lending" Canada's Official International Reserves 0% 2% 4% 6% 8% 10% 12% 14% 16% 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Date Share of GNP Canadian International Investment Position as Share of GNP...
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This note was uploaded on 01/28/2011 for the course ECON 104 taught by Professor Voss during the Winter '10 term at University of Victoria.

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09_Lecture_Slides_Part_1_with_Graphs - Economics 104 Fall...

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