In-Depth Notes on International Finance and Exchange Rates

International Trade and Global Financial Flows

  • International Trade: Buying or selling goods/services across national borders.
    • Exports: Goods/services produced domestically, sold to foreign buyers.
    • Imports: Goods/services produced abroad, purchased by domestic buyers.
    • Examples: Pork from Hylife, cars, fish, etc.
  • Global Financial Flows: Trading of investment dollars in global markets.
    • Financial inflows: Investments by foreigners in Canada.
    • Financial outflows: Investments by Canadians in foreign countries.

Globalization and Trade Growth

  • Globalization: Increase in global integration of economies, cultures, and ideas.
    • Reasons for Growth in Trade:
    • Cheaper transport and communication.
    • Larger cargo ships (carrying 100× more cargo).
    • Cost-effective air transport.
    • Advances in computer networks.

Canadian Trade Overview

  • Major Exports: Petroleum products, wood, agricultural products, vehicles, and planes.
  • Major Imports: Clothing, appliances, raw materials, and machinery.
  • Canada’s trade has doubled as a share of the economy compared to 50 years ago.
  • Top trade partners: United States and China

Investment and Financial Transactions

  • International Investment: Involves portfolio investments (stocks/bonds) and foreign direct investments (physical assets).
    • Example: Honda's auto plant in Ontario brings in financial investment for Canadian workers, with profits repatriated to Japan.

Exchange Rates and Currency Transactions

  • Nominal Exchange Rate: Price of one country’s currency in terms of another's currency.
    • Example: If C$1 = ¥90, the nominal exchange rate is ¥90 per Canadian dollar.
  • Conversions using Nominal Exchange Rates:
    • To convert dollars to yen: extNumberofyen=extNumberofdollarsimesextNominalexchangerateext{Number of yen} = ext{Number of dollars} imes ext{Nominal exchange rate}
    • To find cost in Canadian dollars: ext{Number of dollars} = rac{ ext{Number of yen}}{ ext{Nominal exchange rate}}

Appreciation and Depreciation of Currency

  • Appreciation: Increase in currency value.
  • Depreciation: Decrease in currency value.
    • Example:
    • Depreciation occurs when the exchange rate drops from ¥100 to ¥70 per Canadian dollar.
    • Appreciation occurs when it increases from ¥90 to ¥120.

Market Dynamics for Currencies

  • Demand for Canadian Dollars:
    • Comes from demand for Canadian exports and financial inflows.
    • As demand for Canadian exports rises, more foreign buyers require Canadian dollars, increasing demand.
  • Supply of Canadian Dollars:
    • Comes from import activity and financial outflows.
    • Higher imports mean Canadians supply more dollars to get foreign currencies.

Factors Shifting Demand and Supply

  • Demand increase factors:
    • Increases in global GDP, lower trade barriers, and enhanced domestic innovation.
  • Supply increase factors:
    • Increase in Canadian imports, lowered trade barriers, and foreign price adjustments leading to higher imports.

Equilibrium Exchange Rates

  • The exchange rate determines the price of Canadian dollars in the foreign exchange market, balancing demand for Canadian goods and services with supply from imports and financial outflows.

Forecasting Exchange Rate Movement

  1. Identify whether demand or supply increases or decreases.
  2. Determine the direction of the shift (rightward for increase, leftward for decrease).
  3. Analyze how these shifts will impact equilibrium exchange rates.