chapter 4 (part 5)

Question 1

what percent of the gdp is from imports and exports?

Answer 1

30%

Question 2

What is the balance of payments?

Answer 2

its a detailed statement of a countries transactions with the world over a given period

Question 3

What are the two components of the balance of payments?

Answer 3

1. The current account - records exchanges of goods and services, earnings from investment income, and net transfers such as for foreign aid.
2. the capital and financial account - records financial flow between canada and foreign investors. and investments by canadians abroad.

Question 4

explain the difference between the current account and the capital financial account

Answer 4

if canada has a deficit in buying and selling goods in the current account. then they will have to make more money investing and borrowing in the capital and financial account.

Buying or selling a computer is a current account transaction. where buying a company that makes computers would be a capital and finance account transaction.

Question 5

what are 7 determinants of exchange rates?

Answer 5

1. Commodity prices - Canada has a-lot of commodities like forestry, when the global market has a high demand for these products. Countries need the canadian dollar to purchase them.
2. inflation deferentials - countries with lower inflation, in time will have more purchasing power than countries with high inflation.
3. higher interest rates - it attracts investment but is only a positive if inflation is kept low
4. current account - a country with a current account deficit is spending more than they are earning. putting downward pressure as they have to buy more foreign currency than other countries buy theirs.
5. economic performance - attracts foreign investors
6. public debts and deficits - If a country has debts its less attractive to foreign investor as the government can use inflation to help pay its debts. also countries will look to other countries to borrow money. and can also start to make doubts that country will be able to pay back debt.
7. political stability

Question 6

what are the two types of exchange rates?

Answer 6

1. Fixed exchange rate - a central bank will have a fixed exchange rate against another currency.
2. Floating exchange rate - most advanced countries use floating exchange rates which allow the markets to decide the exchange rates. only stepping in if they are getting out of hand