Lecture 18 - ECO100 (2)

# Lecture 18 - ECO100 (2) - ECO 100Y ECO 100Y Introduction to...

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CO 100Y ECO 100Y troduction to Introduction to conomics Economics Lecture 18: The Exchange Rate and e Balance of Payments © Gustavo Indart Slide 1 the Balance of Payments

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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: ¾ Current account erchandise account ² Merchandise account ² Service account ² Investment income ² Transfers (grants and gifts) ¾ Capital account i d l d i ² Borrowing and lending ² Capital investment ¾ Official financing account © Gustavo Indart Slide 2 g ² Elimination of deficits or surpluses
Canada’s 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 0 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

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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 h l f th C di d ll i t f f i i ± 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 0.98 (that is, one U.S. dollar is exchanged for \$0.98 Canadian dollars) ± Therefore, the value of the Canadian dollar in terms of U.S. dollars is 1/0.98 = 1.02 hat is one Canadian dollar is exchanged for \$ 02 S © Gustavo Indart Slide 4 ¾ That is, one Canadian dollar is exchanged for \$1.02 U.S. dollars
Flexible and Fixed Exchange Rate Systems ± There are 2 main systems determining the value of the exchange rate: ¾ Flexible exchange rate system ¾ 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 currency 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 central bank (i.e., the Bank of Canada)

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Supply of Foreign Currency ± Since foreign currency (e.g., US\$) is exchanged for Canadian dollars, a supply of foreign currency (e.g., US\$) dd s , s p p y g y ( g , U S \$ ) in the exchange market implies a demand for Canadian dollars ¾ 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: ¾ Canadian exports of goods and services ¾ Capital inflows (e.g., foreign investment) © Gustavo Indart Slide 6 ¾ Foreign visitors to Canada
Demand for Foreign Currency ± Since foreign currency (e.g., US\$) is exchanged for Canadian dollars, a demand for foreign currency (e.g., S\$) i h h k

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Lecture 18 - ECO100 (2) - ECO 100Y ECO 100Y Introduction to...

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