This preview shows page 1. Sign up to view the full content.
Unformatted text preview: goods and services
That is, the import and export of goods and services
The capital account records the flows of capital between the
domestic economy and the rest of the world
That is, Canadian investment abroad and foreign
investment in Canada, as well as international lending and
© Gustavo Indart Slide 19 The Exchange Rate
The exchange rate is the relative value of the currencies of two
We will define the exchange rate to be the value of one unit of
foreign currency measured in terms of Can$
For instance, if the exchange rate for the US$ is 0.96, then
one US$ exchanges for Can$ 0.96
There is, therefore, one exchange rate for each international
Similarly, we can measure the value of one Can$ in terms of
Given the example above, the value of one Can$ in terms of
US$ is 1/0.96 = 1.04, that is, one Can$ exchanges for US$
When the value of the exchange rate rises, we say that the Can$
has depreciated; similarly, when the value of the exchange rate
falls, we say that the Can$ has appreciated
© Gustavo Indart Slide 20 The Exchange Rate Between the
Canadian Dollar and the U.S. Dollar Source: P. Krugman, R. Wells and A. Myatt, Macroeconomics.
© Gustavo Indart Slide 21...
View Full Document