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.

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: 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

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

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