ECON 362 Macroeconomic Theory Problem set on small open economyECON 362 Macroeconomic Theory Problem set on small open economy

One paragraph respond for each Discussion post. Two paragraphs totalIn your responses, provide constructive critiques and supplemental insights. Support your critique with sound reasoning and evidence.Response 1(1) What are the most important operational and financial risks in this arrangement?There are many key challenges that U.S. companies face while entering the Canadian business market. The biggest financial risk that the company will face is the fluctuation in the currency exchange rate. Currency spikes have been known to be detrimental to companies who have not researched the foreign market and have not tried to predict which way the change is headed. The Canadian dollar is more stable than most their markets, but like the other markets it is highly sensitive, especially to exports demands and energy. For example, the oil problem has reduced the Canadian dollar, which in return makes other international industries more competitive globally. If these commodities were reversed at any point in time Canada would not be on the better end of things. An operational challenge that companies face is the tightening of the labor market. Like other markets, the overall costs of the Canadian market are lower than that of the U.S. There is not a surplus of workers In this market and new companies will have trouble findings talented employees to work for their company (potential wage inflation).(2) How can the company pay its Canadian employees, who presumably want Canadian dollars, when its U.S. customers are paying in U.S. dollars?A company cannot simply exchange checks into Canadian dollars and pay their Canadian employees because they would have an issue with the Canadian revenues Agency (CRA), which regulates tax laws and tax with holdings. One way a company can pay Canadian employees is by working with a professional payroll company that will aid in the process. This is the easiest way f a company doesn’t want to learn complex legal codes. If not the employee must W-2 form, a T2209 to claim foreign tax credit, and they must report all income to the CRA. (3) Furthermore, how can it calculate its profit if revenue is in U.S. currency and most of its costs are in Canadian currency? Adjusted cost base must be calculated in the U.S. dollars. When you convert U.S dollars into a foreign currency, the adjusted cost base is established U.S. dollars. When you convert the funds later on back in the U.S dollars, you will be able to see you capital gains or loses. The company will determine profit based off of these umbers, but it has to be careful when holding money in multiple accounts because the adjusted cost base must be calculated in the same currency and all accounts together simultaneously.ReferencesFoster , P. (2015, January 29). Blog. Retrieved January 18, 2018, from http://thebusinesstherapist.com/2015/01/understand...Response 2The most important risks to consider are the potential political risks and foreign exchange rate risks. In the current international currency market, currency exchange rates can fluctuate. The exchange rate fluctuation could affect the import and export of the goods being sold in the US that were produced in Canada. This could have negative impacts to the business. The functional currency is defined as the currency of the primary economic environment in which the entity operates. Normally, that is the currency in which the majority of the subsidiary’s business activities are transacted. This task can be more difficult than it seems and may require significant judgment. The functional currency is not necessarily the home currency or the currency in which the subsidiary keeps its books. An entity’s functional currency might be the currency of the country in which the entity is located (the home currency), the reporting currency of the entity’s parent or the currency of another country.Ang, M (2016). Functional Currency. Retrieved January 19, 2018, https://isca.org.sg/media/3694/jan-46-49-functional-currency-highlights-of-technical-clinic.pdf