1. 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)

2. 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”

3. 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

4. The Current Account  Current Account: The account which summarizes all international transactions associated with current economic activity  4 types of transactions which appear here:  1. Trade in merchandise (tangible goods)  2. Trade in service (“invisible” item)  3. Flows of investment income (“invisible” item)  4. Transfers (“invisible” item)

5. 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 -

6. 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

7. 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

8. 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

9. Current Account Balance  Current Account Deficit: When receipts < payments = negative net balance  Current Account Surplus: when receipts > payments

10. 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

11. 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

12.  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

13. 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

14. 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

15. 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

16. 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