Question

Let the initial current account deficit of Canada equal $200 billion. Explain how each of the following will affect the change in net foreign investment position and/or current account balance for Canada:

A) Initially, the value of foreign-owned assets in Canada is $2.0 trillion (US dollar) and the value of assets owned by Canada overseas is $1.8 trillion (US. dollar). Now the value of foreign-owned assets in Canada decreases by 12% and the value of assets owned by Canada increases by 9%.

B) Canadian dollar has been appreciated in terms of US dollar by 5%.

C) Initially, Canada exports $150 billion worth of crude oil to overseas markets. Now it decreases its export by 15% due to increased publicity against Canadian crude oil.

Answer 1

(A) Net foreign investment (NFI) = Assets owned by Canada overseas - Foreign owned assets in Canada

Initial NFI ($ Trillion) = 1.8 - 2 = - 0.2

After the changes,

NFI ($ Trillion) = (1.8 x 1.09) - (2 x 0.88) = 1.962 - 1.76 = 0.202

Therefore, after the changes,

NFI increases by ($0.202 + 0.2) = $0.402 Trillion = $402 Billion

Since by definition, NFI = Net exports ceteris paribus,

When NFI increases by $402 Billion, Current account balnce increases by $402 Billion.

New current account deficit ($ Billion) = 200 - 402 = - 202 Billion (i.e. Current account surplus = $202 Billion)

(B) When Canadian dollar appreciates by 5%,

Current account deficit will increase by 5% and new current account deficit (in US$ Billion) = 200 x 1.05 = 210

(C) New level of exports ($ Billion) = 150 x 0.85 = 127.50

Since Current account deficit will increase with decrease in exports,

New current account deficit ($ Billion) = 200 + 127.5 = 327.5

By equivalence, NFI will decrease by $127.5 Billion.