Module 9

Question 1

FDI vs. FPortfolio INvestment

Answer 1

FDI: When a firm runs part of its operation abroad or invests in another company abroad
FDI makes economic sense for many businesses: it helps broaden markets and can cut wage costs, for example

Foreign portfolio investment: is investment funded by foreign sources but operated domestically. Portfolio investment allows investors to hold financial assets that deliver greater profit and reduce overall risk relative to financial investments available at home

Question 2

Balance of payments identity

Answer 2

Balance-of-payments identity: an equation that shows that the value of net exports equals net capital outflow

NCO = NX

Question 3

When domestic interest rates go down, how is NCO affected

Answer 3

When the domestic interest rate goes down, Canadians will be more apt to invest their money overseas where there are higher interest rates that they can earn money on. In addition, there will be less people overseas looking to invest in Canada, and the two of these facts combined cause net capital outflows to go higher

Question 4

Equation for demand for loanable funds in the open economy

Answer 4

D = NCO + I

Question 5

Exchange rate

Answer 5

Exchange rate: the value of one currency expressed in terms of another currency

Question 6

Reciprocals of currencies

Answer 6

When we examine exchange rates of currencies, the rates will be reciprocals of each other

If $1 is worth 0.76 euros, then 1 euro is worth $1.32 (since $1 divided by 0.76 is 1.32 $/euro)

Question 7

Exchange rate appreciation and deppreciation

Answer 7

Exchange-rate appreciation: When the value of a currency increases relative to the value of another currency

Exchange-rate depreciation: In contrast, when the value of a currency decreases relative to other currencies

Question 8

The Exchange Rate and Net Exports

Answer 8

When the Canadian dollar appreciates against a foreign currency, Canadian goods become more expensive to people abroad and foreign goods become cheaper for Canadians. As a result, net exports would decrease

When the Canadian dollar depreciates against a foreign currency, Canadian goods become cheaper to people abroad and foreign goods become more expensive for Canadians. As a result, net exports would increase