Chapter 18 FINANCING INTERNATIONAL TRADE. TERMS Exports – sell goods to buyer from another country (who need to buy Canadian dollars) Imports – buy goods.

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Presentation transcript:

Chapter 18 FINANCING INTERNATIONAL TRADE

TERMS Exports – sell goods to buyer from another country (who need to buy Canadian dollars) Imports – buy goods from another country in their currency

Exchange Rate Exchange rate – the price one currency can be purchased for another Appreciation (increase in value) and Depreciation (in value) occur depending on supply and demand of our dollar Exchange rate = equilibrium of supply & demand e.g. Cdn $1.00 = us $0.62 or Cdn $1.61 = us $1 Formula: multiply lower currency by higher e.g. $50 Cdn = how many $US? –$50 Cdn x 0.62 = $31

DOLLAR DETERMINANTS Change in demand for our goods Change in our interest rates (attracts foreign capital > $ increases) Change in supply

FIXED EXCHANGE RATE “Peg” to the us dollar at a sepcific rate then buy or sell your currency to keep at that rate … Why? Provide stable currency for economy. Problem? Large companies\investors would invest in other countries until dollar devalued (reduce value) and then buy back

FLEXIBLE RATE Let supply & demand determine rates … But most are supported by “managed float” Adopt us dollar to drop devaluation??? –Not a cure, just a bandage.

BALANCE OF PAYMENTS Keeps track of international payments and receipts in two categories: Current account: –Goods (positive for Canada) –Services (usually negative … travel) –Investment (always negative … dividends, interest) –Overall balanced Capital & finance account: –Capital includes pensions, inheritances to Cdn’s abroad –Financial account includes direct investment by Cdn’s abroad (CDI) and by foreigners in Canada (FDI) –Until recently FDI larger but trend reversed (1999) –Official international reserves held by b of c to help manage the dollar Payments are balanced as money flows are needed to balance flow of goods, therefore the term “balance of payments”