Goods and services the capital account records the

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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 borrowing © Gustavo Indart Slide 19 The Exchange Rate The exchange rate is the relative value of the currencies of two countries 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 currency Similarly, we can measure the value of one Can$ in terms of foreign currency 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$ 1.04 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...
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