Balance of payments and Dollarization in Canada By: Gwendolyn Chee

Learning Goals I will be able to identify and explain Balance of Payments I will understand Canada’s Balance of payments I will be able to explain how different currencies can complicate trade among countries I will be able to identify and explain “dollarization” and its different types I will be able to explain the advantages and disadvantages of dollarization in Canada

What is Balance of Payments? Nations keep track of their international payments and receipts in their balance of payments account. This is divided into two main parts: Current Account, and Capital and Financial Account.

Current Account Goods (Visibles): Raw materials, Processed or Manufactured goods Services: Tourism, Transportation, Commercial Services (Management and Consulting), Government Assistance to other nations Investment income: Dividends and interest earned from investments in Canada and abroad

Capital Account Migrant’s funds Inheritances Government pension payments to Canadians living abroad Eg: Inflow: Canadian receives inheritance from a relative from another country Eg: Outflow: Government pension paid to a retiree living in Florida

Financial Account Direct Investment: Involves investors who establish a new business or take over one by purchasing controlling shares Eg: Inflow: Foreigners invest in Canada Outflow: Canadians invest abroad Portfolio Investment: Involves investors who receive dividends or interest on stocks and bonds but do not control the company Eg: Inflow: Foreigners purchase Canadian stocks and bonds Outflow: Canadians purchase foreign stocks and bonds

Balancing the Account The Current account, and Capital and Financial Accounts should balance Eg: If the Canadian Current Account records a surplus, The financial and capital accounts must finance foreign demand for Canadian dollars by recording more outflows of Canadian money than inflow of foreign money. It runs a deficit to pay for the surplus on Canada’s current account

Canada’s Balance of Payments Canada’s Current Account was in a deficit of 17.3 Billion in the fourth quarter in 2012

How different currencies can complicate trade among countries

Exporters demand payment for their goods in their own countries’ currencies because they cannot pay for raw materials and employee’s wages using foreign currency In the past, foreign banks had to get together with Canadian banks to meet their customer’s needs and complete the transactions using the different currencies Now, Banks have to obtain foreign currency from the foreign exchange market, which is a computerized global network of banks, to meet their customer's needs and complete the transactions using the different currencies

What is Dollarization? Dollarization is when a country replaces its domestic currency with the currency of another country. So if Canada decides to use the US currency as legal tender and a store of value, then Canada is dollarized.

3 Types of Dollarization Official - Eg: In the British Virgin Islands and El Salvador, where the government stopped issuing the domestic currency, which has been replaced by the US dollar. Semi-Official: In the Bahamas and Uruguay where the domestic currency is used alongside the US dollar as legal tender. Unofficial: when residents of a country hold a significant portion of their financial instruments (bank deposits, stocks and bonds) in foreign currency instead of local currency. An example is in Jamaica where a huge proportion of assets are denominated in US dollars so that they will maintain value even when domestic currency loses value.

Dollarization in Canada This is when Canada adopts the US Dollar.

Advantages of Dollarization in Canada Canadians would be forced to advance productivity to remain competitive rather than relying on an increasingly depreciated dollar. Reducing risk and protecting against inflation and devaluation More stable financial environment, Increase investor’s confidence in the economy, Thus increase in investment in Canada

Disadvantages of Dollarization in Canada Loss of control over monetary policy and using exchange rate as a tool to impact economy. The US Government would control the monetary policy so as to benefit the US economy and in the interests of Americans alone thus if the Canadian economy were having a recession while the US economy is booming, the monetary policy adopted by the US government may end up having negative effects on Canada’s economy. And if because of this, Unemployment in Canada were to rise, because of the strict visa requirement policies between Canada and US, there is a barrier to mobility for citizens to find a job in the US, resulting in a problem of high unemployment in Canada.

Disadvantages of Dollarization in Canada The Canadian Government would lose the ability to print money to pay domestic debt or finance domestic public expenditure No cultural prestige of having own Canadian dollar

QUIZ TIME

Work Cited "Canada's balance of international payments, Fourth quarter 2012." Statistics Canada. Government of Canada, Web. 26 May Haughton, André. "Dollarisation Can Improve Trade And Investment." The Gleaner. The Gleaner, Web. 26 May Weintraub, Sidney. "Why Dollarization is a Canadian Affair." Center for strategic and international studies. Center for strategic and international studies, Web. 26 May 2013.

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