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    Canada's International Investment Position: Recent Trends and Implications for Aggregate Measures of Income and Wealth

    Economic Analysis Research Paper Series

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    Canada's International Investment Position: Recent Trends and Implications for Aggregate Measures of Income and Wealth

    by Guy Gellatly and Ryan Macdonald 

    Abstract

    This paper highlights the large progressive decline in Canada's net financial liabilities to non-residents that has occurred over the last fifteen years. It reports tabulations on changes in Canada's international investment position and the associated cross-border income flows, and evaluates the extent to which these investment income flows have affected the size of Canada's gross national income relative to its gross domestic income. The paper also examines the extent to which changes in Canada's net international investment position have increased the national net worth of Canadians relative to the country's stock of national wealth.

    Executive summary

    Over the last fifteen years, there have been substantive changes in Canada's net international investment position, owing to sizable gains in the value of Canadian financial assets abroad. In recent years, Canada's net financial liabilities to the rest of the world have, on balance, declined, mainly due to the cumulative value of Canadian investments abroad which has increased sharply both in absolute terms and relative to the value of Canada's financial liabilities to non-residents. These changes in Canada's net financial position occurred even as the absolute value of foreign claims on Canadian assets increased at a rate comparable to the rates observed in previous decades.

    This paper examines this shift in the relative value of Canada's external assets and liabilities, presenting data on positions and income flows for three broad categories of investment—direct investments, portfolio investments, and other investments. It notes that the aggregate reduction in net financial liabilities reflected inter alia sizable gains in the value of Canada's stock of foreign portfolio assets relative to the value of its portfolio liabilities to non-residents.

    The data on cross-border investments and investment income flows presented herein reveal an important structural shift in Canada's economy in recent years—the sharp reduction in Canada's net foreign debt. They underscore the increasing importance of international investments and investment incomes to changes in the incomes and wealth of Canadians. The cross-border income flows that derive from Canada's investments abroad and from foreign investments in Canada have, in recent years, brought gross national income closer into line with gross domestic income, reflecting declines in the net outflow of investment income to non-residents. Furthermore, reductions in Canada's net foreign debt, as measured by the decline in the value of Canada's net investment liabilities, have substantially narrowed the gap between national net worth and national wealth.

    These changes in net investment position yield new perspectives on the international dimensions of Canada's economy—perspectives that, on balance, are incongruent with the traditional notion of a domestic economy whose international investment activities reflect a singular dependence on foreign capital.

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