14.1 - The Balance of Payments
 The World is linked to the Canadian economy by trade
 When Canada spends on foreign imports, there is a monetary
outflow from the Canadian economy
 When foreign countries spend on Canadian exports, there is a
monetary inflow for the Canadian economy
 Same principles apply to trading financial assets (e.g. stocks)
The Balance-of-Payments Accounts
 Canada’s balance-of-payments accounts show in detail the
connections between the Canadian economy and the rest of
the world
 At any time, a statement of the account shows how the
inflows and outflows “balance”
Receipts and Payments
 Transactions in these accounts are divided into:
 Receipts: Monetary inflows to Canadian economy
 i.e. foreign purchases of Canadian exports and buying Canadian
financial assets
 Are considered positive, so are given a (+) sign in the accounts
 Payments: Monetary outflows from Canadian economy
 i.e. foreign imports and buying foreign financial assets
 Are considered negative, so are given a (-) sign in the accounts
The Current Account
 Current Account: The account which summarizes all
international transactions associated with current economic
activity
 4 types of transactions which appear here:
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1. Trade in merchandise (tangible goods)
2. Trade in service (“invisible” item)
3. Flows of investment income (“invisible” item)
4. Transfers (“invisible” item)
Trade In Merchandise
 Most significant aspect of the current account
 These are looked at relative to a merchandise balance of
trade – the difference between how much you make with
exports minus your debt for imports
 If you make more with exports than you import, this number is +
 If you import more than you make with exports, this number is -
Non-merchandise Transactions
 Services: tourism is an important traded service
 Spending by foreign tourists travelling in Canada represents a
service export – creates an inflow of funds from foreign countries
 When Canadians travel outside Canada, their spending in foreign
countries is a service import that causes an outflow of Canadian
funds
 Other examples: insurance, telecommunications…
 In 2010, the service account had a net
balance of -$23.3 billion
 More services were imported by Canadians
than were exported
Non-merchandise Transactions
cont’d
 Investment Income: An American company’s dividends
received by a Canadian stockholder are treated as a receipt in
the current account (a positive figure)
 Payments to the German owner of a Canadian government
bond are shown as a payment in the accounts, or a negative
figure
 Due to extensive foreign ownership of Canadian stocks and
bonds, payments of investment income > receipts
 Canada results in a large negative balance on
its investment income account
Non-merchandise Transactions
cont’d
 Transfers: funds entering/leaving Canada through payments
 do not involve shifts in financial assets
 Examples include:
 Private gifts that involve cash to/from Canada
 Pension payments to (inflow) / from (outflow) Canada
 Government development assistance to low-income countries
from a foreign source: outflow
 In 2010, transfers showed a net balance of -$2.4 billion
Current Account Balance
 Current Account Deficit: When receipts < payments = negative
net balance
 Current Account Surplus: when receipts > payments
The Capital & Financial Accounts
 Capital Account: summarizes a fairly narrow range of
inflows/outflows involving Canadian dollars
 e.g. transfers of either intangible assets (patents, TM’s) or savings
 Negative Payment on capital account: e.g. a Canadian acquires a
patent owned by a company in India
 Positive Payment on capital account: e.g. a newcomer to Canada
receives a bequest from a relative in China or moves their own
financial assets to Canada
The Capital & Financial Accounts
 Financial Account: summarizes all international transactions of
financial assets involving Canadian dollars such as government
bonds
 When ownership of financial assets is being exported from
Canada, this is shown as an inflow of receipts
 Note: interest paid on bonds represents an outflow of payments
 e.g. If a Canadian purchases a stock in a foreign company, the
Canadian ownership is seen as an import of ownership
 Transaction is an outflow from the financial account
 Note Again: any interest payment on the stock is seen as an
inflow
Direct & Portfolio Investment
 Most significant transactions on financial accounts are with
buying & selling stocks & bonds
 Divided further into portfolio investment and direct investment
 Direct Investment: when a buyer has 10% of a company’s
voting shares and results in significant influence in a company
 e.g. Inflow of Direct Investment: if an Australian financier
gained control of a Canadian gold mining company
 e.g. Outflow of Direct Investment: if a Canadian retailer gained
significant ownership of a British competitor
Direct & Portfolio Investment cont’d
 Portfolio Investment: is a passive investment in securities,
which entails no active management or control of the issuing
company by the investor. The purpose of the investment is
solely financial gain
 e.g. a Japanese resident buys a Canadian federal government bond
– this is shown as a receipt/positive entry on financial account
 e.g. if a Canadian buys a few hundred shares in a large American
corporation that trades on the New York Stock Exchange – this is
shown as a payment/negative entry on financial account
Capital & Financial Account Balances
 Capital & Financial Accounts Surplus: Positive net balance when receipts on Canada’s capital and financial accounts
exceeds payments
 In 2010, this balance was $59.6 billion – this means that there are
lower investments by Canadians in foreign markets than by
foreigners in the Canadian economy
 Capital and Financial Accounts Deficit: a negative net-balance
and outflows exceeding inflows
 Higher investments by Canadians in foreign markets than by
foreigners in the Canadian economy
Balance-of-Payments Surpluses and
Deficits
 A number summarizing the state of a country's international
transactions, usually equal to the balance on current account
plus the balance on financial account
 If this number is positive, then you have a balance-of-payments
surplus
 If negative, you have a balance-of-payments deficit
 This shows what’s higher: inflows or outflows on all foreign
transactions involving trade and financial assets
Changes in Official Reserves
 Change in Official Reserves: Bank of Canada sometimes buys
and sells foreign currencies using government reserves of
foreign currency
 Equal in value with opposite sign to surplus/deficit in balance of
payments
 The change in official reserves is added to the balance-of-payments
surplus or deficit so that the balance-of-payments accounts sum to
zero