Lecture Macroeconomics - Chapter 5: Canada in the global economy

Chapter 5 decribes Canada in the global economy. In this chapter you will learn: That trade is crucial to Canada’s economic well-being, the importance of specialization & comparative advantage in international trade, how the value of a currency is established on foreign exchange markets, the economic costs of trade barriers, about multilateral trade agreements & free trade zones.

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Chapter 5

Canada in the Global

Economy

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In this chapter you will learn

That trade is crucial to Canada’s economic

well-being

The importance of specialization &

comparative advantage in international trade

How the value of a currency is established on

foreign exchange markets

The economic costs of trade barriers

About multilateral trade agreements & free

trade zones

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Chapter 5 Topics

International Linkages

Canada & World Trade

Back to the Circular Flow Model

Specialization & Comparative Advantage

Foreign Exchange Market

Government & Trade

Multilateral Trade Agreements &

Free-Trade Zones

Increased Global Competition

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Other National Economies

Canadian Economy

Canadian

Economy

Goods & Services Capital & Labour Info & Technology

Money

Figure 5-1

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volume of international trade has

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Exports of goods & services as % of GDP, 1999

Japan U.S.

United Kingdom

France Italy Germany New Zealand

Canada The Netherlands

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Canada is dependent on other

countries for many goods

imported goods compete with

Canadian goods in many

markets

many Canadian industries rely

on foreign markets

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Canada has a trade surplus in

goods

Canada has a trade deficit in

services

Canada imports goods in some

of the same categories it exports

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% of total exports

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% of total imports

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Canada trades with:

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Canadian Exports & Imports of Goods by Area, 2000

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Rapid trade growth because of:

Transportation Technology

Communications Technology

General Decline in Tariffs

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GLOBAL PERSPECTIVE 5.2

Comparative Exports, 1999

Spain Singapore Taipei, Chinese

Mexico Korea, Rep of Belgium China Netherlands

Italy Canada United Kingdom

France Japan Germany United States

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CANADIAN BUSINESSES

CANADIAN HOUSEHOLDS

CANADIAN RESOURCE MARKETS

CANADIAN PRODUCT MARKETS

$ CO

CO M ES

GOODS & SERVICES

CANADIAN GOVERNMENT

GOODS & SERVICES

NET

Cdn Imports

Cdn Expenditures Cdn Exports

Foreign Expenditures

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Specialization & Comparative

Advantage

Basic Principle

• Specialization & international trade

increase the productivity of a nation’s resources & allow for greater total

output than otherwise possible

Comparative Costs

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tonnes of corn for 1 tonne of soybeans Canada must give up

3 tonnes of corn for 1 tonne of soybeans

Canada has comparative advantage in soybeans

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tonne of soybeans for 1 tonne

of corn Canada must give up

1/3 tonne of soybeans for 1 tonne

of corn

Mexico has comparative advantage in

corn

Mexico has comparative advantage in

corn

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Advantage

Basic Principle

Terms of Trade

• must be mutually beneficial

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Advantage

Basic Principle

Terms of Trade

Gains from Specialization & Trade

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A Competitive Market

Linkages to All Domestic &

Foreign Prices

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Dollar-Yen Market

– depreciation– appreciation

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Foreign currency price

of dollar falls value of foreign International

currency rises (foreign currency

currency rises

International value of dollar falls (dollar appreciates)

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Trade Impediments & Subsidies

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Why Government Trade

Interventions?

from Trade

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Costs to Society

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Multilateral Trade Agreements

& Free-Trade Zones

Reciprocal Trade Agreements

GATT

WTO

The European Union (EU)

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winners & losers

resources are reallocated

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