Exports, imports and trade balance
[Net exports = Value of countries exports - Value of countries imports]
-Net exports can also be called trade balance,
-Trade Surplus - if net exports are + , the country sells more goods and services abroad than it
buys.
-Trade Deficit - if net exports are – , the country buys more goods and services abroad than it
sells.
-Balanced Trade - If net exports are 0
The flow of financial resources
[Net capital outflow = Purchase of foreign assets by domestic residents - Purchase of
domestic assets by foreigners.]
When net capital outflow is negative, a country is experiencing a capital inflow.
GDP formula with NX
[GDP = C + I + G + NX]
S = I + NX
[National Saving = Domestic investment + Net capital outflow]
Consumption - includes all purchases from domestic companies EVEN IF THEY ARE
IMPORTED
Domestic Spending = C + I + G
Nominal Exchange Rates
-The rate at which a person can trade the currency of one country for the currency of the other.
If exchange rate is 80 yen/ dollar then it is also 1/80 dollar per yen
Appreciation - the exchange rate changes so that a dollar buys more foreign currency
Depreciation - the exchange rate changes so that a dollar buys less foreign currency
Basically, if 1 Yen is worth 0.01 dollars, then something price in yen, say for example a doll is
worth 1000 yen, then to find out what that price is in CAD I can just multiply 1000 by 0.01, and
that will give me the price in CAD
Real Exchange Rates
Real exchange rate = (Nominal exchange rate x domestic price) / Foreign price
The real exchange rate is a key determinant of how much a country exports and imports.
Appreciation - Canadian goods have become more expensive compared to foreign goods, so
Canada’s net exports fall.
Depreciation - Canadian goods have become cheaper relative to foreign goods, so Canada’s
net exports rise.
Purchasing power parity
-a theory of exchange rates whereby a unit of any given currency should be able to buy the
same quantity of goods in all countries.
-if a kilo of coffee costs 500 yen in Japan and $5 in Canada, then the nominal exchange rate
must be 100 yen per dollar (500 yen/$5 = 100 yen per dollar).
[1/p = e/P*] P is price of basket in Can, P* is price of basket in Jap