2. The accompanying diagram shows Canadian-owned assets abroad and foreign-owned

Question

2. The accompanying diagram shows Canadian-owned assets abroad and foreign-owned assets in Canada, both as a percentage of Canada's GDP. As you can see from the diagram, both have trended upward from 1981 to 2011, especially Canadian-owned assets abroad. Percent of GDP Foreign-owned assets in Canada 120% 100 80 60F 40 Canadian-owned assets abroad 20F Year Source: Statistics Canada. a. Since Canadian-owned assets abroad increased as a percentage of GDP, does this mean that Canada, over the period, experienced net capital outflows? b. Compare the net capital flows in in the early 1980s to the net capital flows in the late 2000s. Did the net capital flows increase or decrease? Why?

Explanation / Answer

a).

As we know that “capital account” records transactions in assets. So, mathematically the “capital account balance (KAB)” is given by.

=> KAB = receipt from sale of assets to foreigners – spending on buying on assets from foreigners.

Now, if “KAB > 0”, => the capital account is in surplus, => there is “capital inflow”. Similarly, if “KAB < 0”, => the capital account is in deficit, => there is “capital outflow”. So, here as the “Canadian-owned assets abroad increased as a percentage of GDP” doesn’t mean “net capital outflow”.

b).

Now, if we compare “foreign-owned assets in Canada” and “Canada-owned assets abroad”, then we can see that the difference between the two decreases, => the capital account improves over time, => the net capital flow decreases over time.

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