Ch. 16 - International Finance & The Exchange Rate Flashcards
What are financial inflows?
What are financial outflows?
Financial Inflows: Investments by foreigners in Canada
Financial Outflows: Investments by Canadians in foreign countries
What is a nominal exchange rate?
The price of a country’s currency (in terms of another country’s currency)
Ex. Canadian Dollars to Yen
NER (Price of a dollar in yen) = (# of yen) / (# of dollars)
What is appreciation?
What is depreciation?
Appreciation: When the price of a currency rises
Depreciation: When the price of a currency falls
What is the foreign exchange market?
The market in which currencies are bought & sold
What is the real exchange rate?
The ratio of domestic to foreign prices, measured in the same currency
- measures the (un)competitiveness of Canadian products
- A real exchange rate depreciation leads Canadians to import less & export more
- The real exchange rate is the exchange rate for output
- Real exchange rate determines next exports
RER = Domestic Price in Dollars / Foreign Price Converted into Dollars
RER = Domestic Price Index / (Foreign Price Index / Nominal Exchange Rate)
What is a current account balance?
Measures the difference between the income that Canadians receive from abroad & the income that Canadians pay to people abroad
What is a financial account balance?
The difference between financial inflows & outflows
How does a current account deficit arise?
When we spend more than we earn
- Reflects the imbalance between savings & investment
- Can reflect people livings beyond their means
- Can reflect valuable investments in the future
What are bilateral trade balances?
How much we buy from a specific country compared to how much they buy from us
