Suppose we measure Canada's net capital outflow by what Statistics Canada calls "net international investment position," and we approximate the real exchange rate of the dollar by the price of the Canadian dollar in terms of U.S. dollars. The following table gives some fictitious data on these two variables.
a. What does our open-economy macroeconomic model predict with regard to the relationship between net capital outflow and the real exchange rate?
b. Do you find evidence in the data to support the theory?
c. If you find discrepancies between the data and the theory, what could cause them?
Definitions:
Haircuts
A reduction applied to the value of assets for purposes of calculating capital requirements, risk, or losses.
Productive
The efficiency at which an individual, company, or economy can convert input resources into useful output.
Diminish Profits
The reduction in the amount of earnings as a result of increased costs, decreased revenue, or both.
Economic Profit
The financial difference created by subtracting total explicit and implicit expenses from total revenue in a company.
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