Volume 3, Page 118 Question 18

Looking at the last item:

Canada has current account surplus, and UK has a deficit.

I marked -1.0% for UK as a strenthening of its currency because only when currency is of high, import>export, resulting in a deficit.

I wanna know where I am wrong. thanks

Exports > Import = Capital account surplus…

Bills in exporters currency so will see increase in demand hence strenghtening

These two statements contradict each other (by my understanding):

Canadian Exports > Imports

UK has a current account deficit (I assume because of Imports > Exports)

Based on the material BOTH currencies should appreciate. Is this correct?

I can only assume these appreciations are to the detriment of some other 3rd currency (probably the USD).

I agree with FinNija,

-1% is not a big deficit, and the country needs to keep its currency strong enough to attract foreign capital. This is what Schweser says.

Current account = changes in net foreign assets

  • ve net sales abroad (Surplus - E > I) & -ve net sales abroad (deficit - E < I )

If Import is more - country’s consumption is not getting fulfilled domestically - they will ask for more produce from overseas & if there currency is strong relative to excess producers of such good they import more…Eventually strong currency will widen current account deficit & later comes a point when your import bills rises too much (obligation is in the exporter currency) your currency starts depreciating.