In this activity, we are thinking about the world outside of Canada, and the economic and social impact of the relationships we have with other countries. If you look at your clothing labels, what do you notice? Where did the clothes you are wearing today come from? How did they get here?

To review, imports (M) are goods/services that are consumed in one country, but are produced in other countries. Exports (X) are goods/services that are produced in one country and are sold and shipped to purchasers in another.  A good/service sold as an export by one country is purchased as an import by another.

Economic Thought: David Ricardo

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The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries. Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England. In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire, should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise, and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.

~ David Ricardo, Chapter seven, The Principles of Political Economy and Taxation, 1817

Why trade?

Before we learn about economic theories, what is Canada’s trading relationship with the world? In Economics, there are many theories and models, which are used to explain economic concepts. Your task is to understand why countries trade. Watch this video to identify arguments why trade is good for economies.

Arguments Against Trade

Even though there are sound economic arguments for trade, there are also arguments against trade.

Protectionism represents any attempt to impose restrictions on trade in goods and services.

Extend Your Learning

As you have seen throughout this course, economists often use mathematical examples to illustrate theories. This is also true of the argument for trade. In the opening, you learned about Ricardo’s theory of comparative advantage. He noted that while one country may be able to produce all of its needs, it may incur a high opportunity cost to do so. Let’s take the example of Canada and Brazil. Brazil is the second largest producer of bananas globally and Canada is a large producer of steel. Each of these countries could produce both products, but at what (opportunity) cost? It is better for them to produce one of these products and trade for the other, but let’s prove it mathematically. The chart below shows the total production each country could produce if each country were to produce only these 2 goods using all of their resources. Canada has an absolute advantage in the production of both goods, so it would seem they don’t need to trade, but let’s look more closely.

Canada is able to produce more of each good, but when we look at the opportunity cost, there is a difference. We want to look at the ratio of steel to bananas to see the opportunity cost. 

For each tonne of steel that Brazil produces, they give up 10 tonnes of bananas (10,000/1,000 = 10) while Canada only gives up 2 tonnes of bananas (12,000/6,000 = 2). 

On the contrary, for each tonne of bananas Brazil produces, they give up 0.1 tonnes of steel (1,000/10,000 = 0.1) while Canada gives up 0.5 tonnes of steel (6,000/12,000 = 0.5). 

Thus, Canada has a higher opportunity cost when producing bananas and Brazil has a higher opportunity cost in producing steel. It makes sense for Brazil to produce bananas and Canada to produce steel then trade. By moving the resources currently used for the product that is less efficient to the more efficient one, there will be more of each product produced.

Fair Trade

Almost 7,000 products from coffee to flowers are Fairtrade certified in Canada, so when you shop, look for the FAIRTRADE mark.

Exchange Rate

The exchange rate is the value of one currency for the purpose of conversion to another. If you travel to another country, and you want to purchase any goods/services, you need to use the currency of the country you are in. Before you go, you would exchange Canadian dollars into the currency of your destination. You can do this at a variety of financial institutions. The value of a currency changes, compared to another, depending on market forces (supply and demand). If the currency varies depending on the market, it is called a floating rate. Sometimes, countries will not allow the exchange rate to float, and choose to have a fixed exchange rate.

Read this article, At 80 US cents, the loonie is up 10% since May: Who wins and who loses? from Global News (Original article)

Trade Agreements

Trade between nations is an important part of world economies. Many countries and regions enter into agreements to enhance trade and boost their domestic economies. You will have the opportunity to investigate several trade agreements that Canada has signed with different nations.

You will be examining several major trade agreements to determine economic significance. The focus is not just on defining/explaining, but on analysing the significance to Canada of these selected trade agreements.

Practice