The Canadian Economy

Decent Essays
II: How do these fluctuations affect the Canadian economy?
A change in energy prices will affect the aggregate economic activity through five channels (CITATION REQUIRED). The channels are the following:
• Terms-of-Trade
• Foreign Demand
• Energy Supply
• Cost
• Uncertainty
The terms-of-trade is defined as the ratio of export prices to import prices (CITATION REQUIRED). According to the Bank of Canada’s report: “Following an energy price change, there is a redistribution of real income between energy-exporting and energy importing countries.” (CITATION REQUIRED) .Hence, lower oil prices reduce the ratio of export prices to import prices (the terms-of-trade) thereby reducing the volume of imports that can be purchased with a given volume of
…show more content…
On the other hand, this puts net importers, such as the United States, in a better position. As prices of oil decreases, the terms-of-trade of net importer will improve. The United States is a net importer of oil products (See Figure II-B), and is also the main trading partner for Canada. Roughly 62% of the Canada’s exports are sent to the U.S (CITATION ). In fact, 40% of America’s oil imports come from Canada, and it seems to be consistently increasing (CITATION). Furthermore, this trend should continue as Canada keeps expanding is capacity to export oil (See Figure II-C). Projects for this are already on their way such as the KeyStone XL, a pipeline that ' 'will have the capacity to transport 830,000 barrels per day of crude oil from Canada ' ' to the United …show more content…
As the economy of U.S. grows, so do Canada’s exports, especially in the non-energy sectors. Thus, this increase should in other sector should offset the decline in the energy sector. In fact, Baumeister et al. found an essentially neutral impact on Canadian GDP growth from a supply-driven 10% oil price shock, once accounting for the impact of the shock on foreign demand (Baumeister et al. 2010). In more recent research, it was found that external demand will offset the weakness of the oil sector resulting in positive impact on Canadian GDP less than .1% working with the assumption that for 10% decline in oil prices raises U.S. GDP growth by 0.1% to 0.2% (CITATION). Thus, it seems that an change in oil-price has somewhat neutral impact on aggregate output for Canada, as a whole, when accounting for changes in foreign demand.
On the other hand, a drop in the oil price will have both short- and long-term effects on oil supplies (CITATION). A drop in oil prices puts Canada’s industry in a tough position because the prices are now too low to justify new profitable projects. In fact, Canada’s main source of new oil projects comes from oilsands (CITATION). Since the extracting oil from the oilsands is rather expensive, it needs the prices to be high enough for future profitability (Citation). This leads to the conclusion that investment in this industry should decrease, and

Related Documents

  • Decent Essays

    As oil prices dropped and less demand for oil recently the exportation of oil has become slower. Thus in turn has caused negative consequences for provinces and countries economy’s. In Canada its been noted that we have been major players in oil exportation recently, with the declining price of oil and less demand our GDP will suffer. It is estimated that, “One third of a percentage point will be lost because of the oil prices.” This in cause will cause fluctuation of…

    • 1135 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    This is exemplified as there was an overpopulation in the western area of the country, driven by the resource boom. If more labour and investment is required to extract resources, an equal amount, or more, is required to meet Canada's increasingly urgent infrastructure needs. Nevertheless, oil and gas extraction accounted for two-thirds of Canada’s capital spending growth and later made up more than one-quarter of the country’s capital spending. Although lowering tariffs, and allowing free-trade can promote international trade and expand towards foreign markets, the trades of goods has been shrinking. With advancements in recent technology, people aren’t able to predict the future of global economic…

    • 898 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    US Dollar Depreciation

    • 828 Words
    • 4 Pages

    We took a broader look on whether currency depreciation can be effective as a means of narrowing US trade deficits but previously in 2009 data shows that the US trade balance gets better because of a reduction in the import side of the trade account. Evidence suggests no significant increase in US export of goods and services; rather in 2009 there was an unexpected immediate fall of US imports that leads to a decrease in trade deficit. One reason for such a behavior of the trade balance might be linked to a decreased consumption demand in the US economy caused by recent recession and perhaps a temporary appreciation of dollar in that specified period (2009: chart3) had a short-term improvement in the current account position of the United States by cutting the cost of importing goods and…

    • 828 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Canadian economy enters recession Canada has entered recession due to a fall in the price of US crude oil, which has contributed to a lower demand for oil produced in Canada, therefore leading to a decrease in exports and thus a fall in real GDP. The Canadian economy has a negative growth and a contraction of 0.8% and hence indicating a recession. A recession occurs due to a period of a decline of GDP and consequently leading to an increase in unemployment. This occurs in the contraction zone of the business cycle. A recessionary gap arises due to insufficient aggregate demand, as shown in Diagram 1, where the output produced is lower than the potential output Yp.…

    • 749 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    She tries to find out whether the increase in crude oil prices have a long term impact in the economy as a whole. Increase in the price of crude oil can lead to steep fall in the current accounts which further leads to worsening the treasury budgets and the savings and investments. These imbalances remain to worsen because of the increase in crude oil prices and push the economy to larger crisis. India, being a major oil importer suffers from all these threats. Developing countries are affected more than the developed countries due to absence of advanced technology.…

    • 895 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Personal Debt In Canada

    • 975 Words
    • 4 Pages

    If this occurs, much of the wealth accumulated through the growth of the housing market would become obsolete, resulting in the loss in asset value of people’s homes, and the inability for Canadians to pay off their debts. The unsustainability of Canada’s reliance on growth in the housing market is an even further cause for concern, considering that a burst, resulting in a 47 percent decrease in housing price could eliminate almost all of the country’s consumer wealth (Canadian Household Debt Bigger than National Output 2). This is due to Canada dependence on the housing market, with real estate constituting half of all GDP growth in major Canadian provinces (2). Now that we have an understanding of the consequences…

    • 975 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Historically major oil price declines are driven by central bank policy errors that led to global economic recessions. During an economic recession, the world activity reduces causing the oil demand to reduce. The current oil price decline is not a cause of a decline in oil demand instead it is driven by an increase in supply. Due to the fracking technology oil production in the United States and Canada is surpassing production in Saudi Arabia. In 2014 when Saudi Arabia announced they were not cutting down their production to maintain high oil prices.…

    • 781 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Describe sources of EXCHANGE RATE fluctuation in Canada The appreciation of Canadian dollar has been encouraged by several factors such as the decline in the US Dollar, global economy together with commodity prices. Furthermore, the magnitude of the increased exchange rate has become greater as compared to the most recent movements in these factors even though these are the key factor in determining the fluctuation in Canada (Holden, 2007). Since 2002, in relation to declining in the value of US dollar, it is important to know that Canadian dollar is not only the currency that appreciated against the USD. There are also currencies that have appreciated rapidly as compared to the Canadian dollar. One of the currency is euro that raised by almost 61.4% just at the same period when other currencies were appreciating.…

    • 817 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Canada has seen a slightly increase in the GDP growth over Japan, but not significant. The growth in the economy will be affected in 2016 by the wildfires in Fort McMurray, exports, and more job losses than new positions (Kirby, 2016). There has been a decrease in Canada’s exports, mainly to the United States. Canada is currently experiencing a housing boom, which could have an effect on the economy. Some experts feel that it could end in a recession, similar to the U.S. a few years ago.…

    • 995 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Inflation In Canada

    • 1208 Words
    • 5 Pages

    In fact, the government needs to consider implementing another contractionary monetary policy. This time, they should decrease the money supply in the economy. If the Bank of Canada, decreases the money supply, it will raise interest rates and will decrease the spending in the economy (pg 158). The reason why interest rates will rise when the money supply decrease is due to the fact that the money demand curve is downwards sloping. This means that as more money is taken out of the economy, the interest rate will slowly increase.…

    • 1208 Words
    • 5 Pages
    Decent Essays

Related Topics