Professional Documents
Culture Documents
Ninth Edition
CHAPTER 11
Exchange Rates and the
Balance of Payments
Jason Dean, Wilfrid Laurier University
Learning Objectives:
1. Calculate the value of the Canadian dollar in terms
of other currencies and explain the purchasing
power parity theory
2. Identify who wants to buy and sell Canadian dollars
in foreign exchange markets
3. Explain why the value of the Canadian dollar
fluctuates
Learning Objectives:
4. Compare flexible and fixed exchange rate systems
5. Explain the meaning of a balance of payments
surplus and deficit
– For example:
• Currency Depreciation
– Arbitrage
– Currency speculators
– Arbitragers
RISE FALL
• Commodity producers • Americans shop in Canada
Depreciates helped • More domestic cars sold
• Tourism booms • Canadians invest less abroad
• Foreigners invest more
– Foreigners’ tastes
• Decrease in
demand does not
lead to currency
depreciation
• Result is a surplus
of Canadian
dollars on world
market
• Canadian dollar
is overvalued
• Current Account
Current Account
Import of goods and
Exports of goods and services 625 services 671
Foreign factor income from
abroad 91 Balance of trade −46
Transfers received from abroad 11 Factor income paid abroad 105
Net foreign factor income −14
Transfers paid abroad 14
Transfers (net) −3
Balance on Current Account −63
Canadian investment
Capital Account abroad 190
Foreign investment in Canada 258 Net foreign investment 68
Balance on Capital Account 68
Statistical discrepancy 6
Overall Balance (current + capital
11
+statistical discrepancy)
Source: Adapted from the Statistics Canada CANSIM database, http://cansim2.statcan.ca, Tables 376-0101, 376-0102, November 1, 2016.
Current Account
Export of goods and services +164
Import of goods and services _____
= Balance of trade +2
Foreign factor income from abroad +8
Foreign factor income paid abroad _____
Net foreign factor income +15
Transfers (net) _____
= Current Account balance +17
Capital Account
Foreign investment in Canada less Canadian investment abroad +18
= Capital Account balance +18
Overall balance (Current Account and Capital Account) _____
© 2018 McGraw-Hill Ryerson Limited 11- 58
Test Your Understanding
Balance of Payments
Current Account
Export of goods and services +164
Import of goods and services - 162
_____
= Balance of trade +2
Foreign factor income from abroad +8
Foreign factor income paid abroad _____
Net foreign factor income +15
Transfers (net) _____
= Current Account balance +17
Capital Account
Foreign investment in Canada less Canadian investment abroad +18
= Capital Account balance +18
Overall balance (Current Account and Capital Account) _____
© 2018 McGraw-Hill Ryerson Limited 11- 59
Test Your Understanding
Balance of Payments
Current Account
Export of goods and services +164
Import of goods and services - 162
_____
= Balance of trade +2
Foreign factor income from abroad +8
+7
Foreign factor income paid abroad _____
Net foreign factor income +15
Transfers (net) _____
= Current Account balance +17
Capital Account
Foreign investment in Canada less Canadian investment abroad +18
= Capital Account balance +18
Overall balance (Current Account and Capital Account) _____
© 2018 McGraw-Hill Ryerson Limited 11- 60
Test Your Understanding
Balance of Payments
Current Account
Export of goods and services +164
Import of goods and services - 162
_____
= Balance of trade +2
Foreign factor income from abroad +8
+7
Foreign factor income paid abroad _____
Net foreign factor income +15
Transfers (net) _____
= Current Account balance +17
Capital Account
Foreign investment in Canada less Canadian investment abroad +18
= Capital Account balance +18
Overall balance (Current Account and Capital Account) +35
_____
© 2018 McGraw-Hill Ryerson Limited 11- 61
CHAPTER 11