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.

Canada in the Global Economy Chapter SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE     © 2002 McGraw-Hill Ryerson Ltd Chapter 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     © 2002 McGraw-Hill Ryerson Ltd Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter International Linkages Figure 5-1 Goods & Services Capital & Labour Canadian Canadian Economy Economy Info & Technology Other Other National National Economies Economies Money     © 2002 McGraw-Hill Ryerson Ltd Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter Canada & World Trade volume of international trade has been increasing • absolutely • relative to GDP for Canada & the world     © 2002 McGraw-Hill Ryerson Ltd Chapter GLOBAL PERSPECTIVE 5.1 Exports of goods & services as % of GDP, 1999 The Netherlands Canada New Zealand Germany Italy France United Kingdom Canada’s exports make up almost Japan 40% of domestic output of goods & services 10 20 30 40 50 U.S     © 2002 McGraw-Hill Ryerson Ltd Chapter 60 Canada & World Trade 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     © 2002 McGraw-Hill Ryerson Ltd Chapter Canada & World Trade 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     © 2002 McGraw-Hill Ryerson Ltd Chapter Principal Canadian Exports of Goods, 2000 Table 5-1 % of total exports   Machinery & equipment 25 Automotive products 23 Industrial goods & materials 15 Forestry products 10 Energy products 13 Agricultural & fishing products   © 2002 McGraw-Hill Ryerson Ltd Chapter 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 Terms of Trade Gains from Specialization & Trade     © 2002 McGraw-Hill Ryerson Ltd illustrated… Chapter Table 5-6 Canada Mexico corn soybeans corn soybeans 33 19 24 30 60 +35 -10 -35 +10 Outputs available after trade 35 20 25 10 Gains from specialization & trade 1 Outputs before specialization Outputs after specialization Amounts traded     © 2002 McGraw-Hill Ryerson Ltd Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter Foreign Exchange Market A Competitive Market Linkages to All Domestic & Foreign Prices     © 2002 McGraw-Hill Ryerson Ltd Chapter Foreign Exchange Market Dollar-Yen Market • changing rates: – depreciation – appreciation     © 2002 McGraw-Hill Ryerson Ltd Chapter Foreign Exchange Market Equals Dollar price of foreign currency rises Equals Equals Foreign currency price of dollar falls Equals     © 2002 McGraw-Hill Ryerson Ltd International value of dollar falls (dollar appreciates) International value of foreign currency rises (foreign currency appreciates) Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter Government & Trade Trade Impediments & Subsidies • • • •   Protective tariffs Import quotas Non-tariff barriers Export subsidies   © 2002 McGraw-Hill Ryerson Ltd Chapter Government & Trade Why Government Trade Interventions? • Misunderstanding of the Gains from Trade Political Considerations â 2002 McGraw-Hill Ryerson Ltd Chapter Government & Trade Costs to Society • • •   domestic consumers domestic firms reduction of competition   © 2002 McGraw-Hill Ryerson Ltd Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter Multilateral Trade Agreements & Free-Trade Zones Reciprocal Trade Agreements GATT WTO The European Union (EU) • The EU Trade Bloc The Euro NAFTA â 2002 McGraw-Hill Ryerson Ltd Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter Increased Global Competition winners & losers resources are reallocated     © 2002 McGraw-Hill Ryerson Ltd Chapter Chapter Topics International Linkages Canada & World Trade Back to the Circular Flow Model Specialization & Comparative Advantage Foreign Exchange Market Government & Trade Multilateral Trade Agreements & FreeTrade Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter ... Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter International Linkages Figure 5-1 Goods & Services Capital & Labour Canadian Canadian Economy Economy Info & Technology Other Other National National... Zones Increased Global Competition     © 2002 McGraw-Hill Ryerson Ltd Chapter Canada & World Trade volume of international trade has been increasing • absolutely • relative to GDP for Canada & the. .. markets     © 2002 McGraw-Hill Ryerson Ltd Chapter Canada & World Trade Canada has a trade surplus in goods Canada has a trade deficit in services Canada imports goods in some of the same categories