Nolan Petroff Econ 456 Question Sheet 1:
Question 1:
(1) A British hospital buys an MRI machine from Germany and pays with a 120,000 check in
pounds
British View:
(i) CA falls by 120,000 as imports rise (trade balance decreases).
(ii) FA rises by 120,000 as the payment in pounds represents an export of financial assets.
German View:
(i) CA rises by 120,000 as exports rise (trade balance rises).
(ii) FA falls by 120,000 as the payment represents an import of financial assets (pounds). This is
negative because it represents a net increase in external assets; specifically international reserves.
(2) Manuel Valega, of São Paulo, buys $5,000.00 worth of HSBC UK stock from a Brazilian
Bank, paying with Brazilian Reals.
Brazilian View:
(i) CA has no change.
(ii) FA decreases since there is an increase in Brazilian-owned assets abroad. There is then an
equivalent increase due to the export of Brazilian Reals to the UK.
British View:
(i) CA has no change
(ii) FA is positive since there is an increase in foreign-owned assets in the UK. There is then an
equivalent decrease due to the accumulation of Reals, which represents an increase in UK-owned
foreign assets (foreign currency).
(3) A Mexican consumer imports Canadian maple Syrup and pays with a check drawn on a
Canadian Bank in Montreal
Mexican View:
(i) CA is negative since this is an import (trade balance decreases).
(ii) FA is positive since there is a decrease in Mexican-owned assets abroad (CAD)
**FA = Increase in foreign-owned assets in Mexico - Increase Mexico in owned assets abroad
Canadian View:
(i) CA is positive since this is an export (trade balance increases).
(ii) FA is negative since there is a decrease in foreign (Mexican) owned assets (CAD) in Canada
(4) A Japanese company sells a subsidiary in Japan and with the proceeds buys a French
company
Japanese View:
(i) CA has no change here.
(ii) FA falls because there is an increase in Japanese-owned assets abroad. It then increases by an
equal amount because this is an export of Japanese currency to France.
French View:
(i) CA has no change here.
(ii) FA rises because there is an increase in foreign-owned assets in France. It then falls by an
equal amount because there is an import of Japanese currency (external liability) to France.
(5) A group of American friends travels to Argentina and rents a vacation home for $2,500.
They pay with an American credit card.
American View:
(i) CA falls by $2,500; there is an import of services from Argentina (trade balance falls).
(ii) FA rises as there is an export of a financial asset worth $2,500. Specifically, this is an
increase in foreign (Argentinian) owned American assets (dollars).
Argentinian View:
(i) CA rises by $2,500; there is an export of services to America (trade balance rises).
(ii) FA falls as there is an import of a financial asset worth $2,500. Specifically, this is an
increase in Argentinian-owned assets abroad.
(6) UK sends medicine, blankets, tents, and nonperishable food worth 600 million pounds to
victims of an earthquake in a foreign country
British View:
(i) There is an increase of exports worth $600 million so the trade balance rises. This is offset by
an equal decrease in net unilateral transfers.
Foreign View:
(i) There is an increase of imports worth $600 million so the trade balance falls. This is offset by
an equal increase in net unilateral transfers.
Question 2:
Graph 1: NIIP Actual vs. NIIP Proxy (Q3 2000 - Q3 2022)
Analysis: As seen in the graph, from 2000-2013, Canada’s actual NIIP and the value derived
from the proxy NIIP through simply adding changes to the Current Account Balance were
somewhat close. This begins to significantly diverge in 2014 and onwards, with the actual NIIP
growing substantially while the NIIP Proxy falls. What this suggests is that despite Canada
having negative Current Account Balances over this period, large positive valuation changes
have been pushing the actual NIIP upwards. A potential cause of this diversion may be the 2014
Oil Price Crash which caused the Canadian Dollar and stock market (liabilities) to depreciate.
This would lead to a rise in the NIIP assuming that the external assets Canada owns were not
subjected to the same fall, leading to an overall positive valuation effect.
Graph 2: Actual NIIP vs. Proxy NIIP vs. REER (Q3 2000 - Q3 2022)
Analysis:
As seen in the graph, the actual NIIP and Canadian REER were marginally correlated from 2000
through to 2016. After this point, the Canadian NIIP continued to increase while the Canadian
REER held relatively flat. A potential cause of this (given the time period) is the oil price crash
that grew Canada’s NIIP because the value of foreign owned assets in Canada significantly fell.
When the Canadian REER is compared to the NIIP Proxy we have no significant trend, but
potentially a weak inverse relationship. As seen on the graph, from 2000 - 2009, our NIIP Proxy
moved slightly upwards while the Canadian REER decreased. Then from 2010 - 2016 the NIIP
Proxy fell while the Canadian REER increased. After 2016, this relationship broke down since
the NIIP Proxy continued to fall, with the Canadian REER staying flat. Given the timeframe, this
also likely has something to do with the oil price crash. Strangely though, the breakdown of the
relationship cannot be from valuation effects since the NIIP Proxy is simply based on changes to
the Current Account balance. As such, it is difficult to find an explanation for this.
Interestingly in both cases we can potentially detect at least some relationship until 2016,
whereafter the Canadian REER stays flat but the Actual and Proxy NIIP’s continue to change.
Question 3 Answer: