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The prosperity of canada and its side effects

Canada's State of Trade: Trade and Investment Update 2012 This Web page has been archived on the Web Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

  1. If we are to address future challenges, these numbers will likely increase. Canadians have the opportunity to gain from specialization in two forms.
  2. However, in arts and sports, there are indications that Canada is beginning to embrace, in a truly Canadian way, the diversity of its population. So what happens if two countries, each with identical industry technologies and factor endowments, open up to trade?
  3. The Krugman model employs two basic assumptions, both of which can be readily observed in the real world.
  4. As we understand it, there are two ways the economy grows.
  5. The future of Confederation, he thought, hinged upon the development of the West.

International Trade and Its Benefits to Canada Canada depends heavily on trade to sustain incomes and living standards of Canadians and the prosperity of the nation. Thus, the share of trade in the economy was about 63. Indeed, the share of trade in the economy has risen over the decades, in particular during the 1990s when it climbed nearly 34 percentage points following the elimination of most of the trade-dampening tariff barriers between Canada and two of its most important trading partners—the United States and Mexico.

But statistics only partially highlight the importance of international trade to Canada and Canadians. Economic models and theories can also be used to ask the question of what is the benefit of international trade to Canada.

  1. Although countries without substantial cost differences are not specialized at the industry level in international trade, they are, nonetheless, specialized at the product level within the same industry, which results in intra-industry trade.
  2. Here, the welfare cost to the United States of the nearly complete embargo on its international trade was estimated to be 5 percent of GDP.
  3. It was not intended to be just a story about immigrants for immigrants. In recent years, however, empirical work has been more about accounting for global trade flows than about testing hypotheses related to trade theories.

The answer to the question is, however, multi-dimensional and not entirely computable. From one vantage, the trade data suggest, as a the prosperity of canada and its side effects order of approximation, that one in five jobs in Canada depend on exports, either directly or indirectly. Taken from another perspective, this vastly understates how dependent Canada is, and Canadians are, on trade. The structure and the organization of the entire economy are crucially dependent on trade and integration with regional and global trading networks.

The focus is on Canada and, where possible, we bring forward evidence that pertains to, or can be applied to, Canada. The theoretical aspects of the analysis have been confined to a few broad sections. We have tried to keep these portions as short and non-technical as possible, perhaps too general for the more technical reader. However, the key message about the benefits of trade is intended for the average Canadian—who may never have realized how much trade improves the quality of the Canadian way of life.

The Importance of Trade Many of the benefits of exports to Canadians are straightforward. Exports allow Canadians to sell their goods and services in exchange for foreign goods and services. They also help to support jobs in Canada, directly to those producing the goods and services, and indirectly to those providing supporting activities to the producers of Canadian exports.

Other benefits are less tangible. For example, exports mean added production beyond that produced for the domestic market, which allows for economies of scale in production and lower average costs for producers, in turn lowering prices for consumers. Competing in export markets also means seeking out efficiencies and being innovative in all aspects of business. Rather than trying to produce many products, firms tend to focus on and specialize in products or services where they have an advantage.

This drives up their productivity, allows firms to pay higher wages, and helps to increase the prosperity of the nation. Firms that rise to the challenges of the export marketplace increase their production volumes and become larger. They develop wider and deeper client bases and are better able to withstand downturns and softer market conditions in a region, thus becoming more secure the prosperity of canada and its side effects stable employers.

For governments, larger and more-efficient firms are more profitable and thus pay more in taxes, providing additional revenues to the public coffer. These benefits, while indisputably real, are difficult to capture empirically. As a small economy, Canada produces only a fraction of the goods and services it consumes and imports the rest. In a world devoid of international trade, it would be unrealistic to think that a country like Canada could make the necessary investments to produce the range of products and services it presently enjoys.

Indeed, it would be very difficult to imagine a world without international trade for the average Canadian.

  • The division of labour, specialization, and the international exchange of goods and services have been key to improving economic conditions;
  • Federal equalization grants were instituted in the late 1950's to, at least, lessen the tax burden which inevitably befell the citizens of low growth regions in Canada;
  • This drives up their productivity, allows firms to pay higher wages, and helps to increase the prosperity of the nation;
  • Their presence enhances the reputation of Canadian institutions and creates a cosmopolitan and international environment that can enhance the learning experience for domestic students.

The typical Canadian starts the day by awakening to the sounds of a clock radio. Inside that radio, the alarm mechanism is controlled by a microchip. That microchip, and indeed the entire clock radio, was most likely imported. Even the bed linen, whether cotton or polyester, is made of fibres that are likely imported. And the headline news, about fiscal austerity in Europe or a natural disaster somewhere in the world, is a service imported into Canada from an international newswire.

Many of the cars the typical Canadian encounters on the daily commute have direct or indirect foreign connections. The operating software and many of the software programs on these devices are also likely of non-Canadian origin. Likewise, many commonly used food products, ranging from spices and out-of-season fruits and vegetables to nuts and chocolate, and even many appliances in Canadian kitchens, are also imported. International trade enriches the lives of everyday Canadians in so many ways and through so many direct and indirect channels that it would be virtually impossible to disentangle its effects or to precisely measure the innumerable benefits and conveniences it brings.

But imports also have other effects on the economy beyond providing variety and choice for consumers. Imports provide inputs to producers and competition for Canadian producers. They provide jobs directly to people in the transportation, wholesale, and retail sectors and indirectly to many others whose activities support those involved in importing; the bankers, for example, who arrange for the exchange of currencies and transfer of payments.

Specialization, Comparative Advantage, and Gains from Trade Economic theory has one central explanation for the process of wealth creation resulting from trade: Throughout economic history, mankind has gradually increased its economic well-being through specialization.

The division of labour, specialization, and the international exchange of goods and services have been key to improving economic conditions. As specialization increased, so has productivity and total output, leading to a larger economic pie to be divided among the population.

There are many instinctive reasons that make specialization more efficient. First, the specialist acquires more expertise and performs better over time. Second, specializing avoids the costs of switching between different activities. Third, specialization avoids the need to provide everyone with a different set of tools for all activities. Finally, economic agents can choose occupations that they enjoy more and thus be better at it.

Trade among nations further accentuates the importance of specialization by allowing the gains from specialization to be extended to a wider area.

In the context of international trade, economists have developed the concept of comparative advantage, in which one party is better than the other at producing all goods and services, but by a different margin.

The concept of comparative advantage was first articulated by David Ricardo in 1817, using an example involving England and Portugal and two goods cloth and wine. Ricardo showed that even when one of the two countries has an absolute advantage in producing both goods i. It the prosperity of canada and its side effects differences between the relative prices between countries as reflected in costs of labour to produce the goods that underpin the incentive to engage in trade.

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A more complete explanation of those gains should also take into account the underlying factors that give rise to different prices, thereby creating the conditions for mutually beneficial trade.

These factors are the ones that lie behind the sources of comparative advantage. They include such things as differences in technology and differences in natural endowments. In addition, there are other gains from trade that are not linked to differences between countries.

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In particular, countries trade to achieve economies of scale in production or to have access to a broader variety of goods. Moreover, if the opening-up of trade reduces or eliminates monopoly power or enhances productivity, there will be gains from trade beyond the usual ones.

Finally, trade may have positive growth effects. Differences in technology As already mentioned, differences between countries are one of the main reasons why they engage in trade. The Ricardian model and its extensions point to technological differences as the source of comparative advantage. These differences allowed each country to exploit its comparative advantage and expand the size of the economic pie.

Differences in resources endowments Given that the Ricardian model assumes labour as the only factor of production, differences in labour productivity thus provide the only possible source of comparative advantage between countries in that model. Clearly, however, differences in labour productivity are not the only source of comparative advantage.

Differences in resource endowments also play a role. For example, countries that are relatively better endowed with fertile land than others are more likely to export agricultural products.

  • It has made immigration an important part of nation-building and Canadian identity;
  • As one author has written:

The idea that international trade is driven by differences in relative factor endowments between countries forms the core of the Heckscher-Ohlin trade model. Because this model focuses on another source of comparative advantage—factor endowments, it provides an additional explanation of trading patterns.

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The model rests on the theory that a country has a production bias toward, and hence tends to export, the good that intensively uses the factor with which it is relatively well endowed. However, the gains from trade in the Heckscher-Ohlin framework are fundamentally similar to those in the Ricardian model: Empirical results While the concepts of comparative advantage and gains from trade appear straightforward, the benefits of trade are difficult to capture empirically.

This is because there is considerable difficulty in translating the theories of Ricardo and Heckscher-Ohlin into forms that are testable by empirical research. Thus, very little is known about the empirical magnitudes of gains from international trade, and the mechanisms that generate these gains.

The example of trade liberalization in Japan in 1858 provides one of the few cases in which a country moved from economic isolation or self-sufficiency to open trade.

Using this example, Bernhofen and Brown 2005 estimate the size of gains from trade resulting from comparative advantage on national income. The Jeffersonian trade embargo that cut off the United States from shipping between December 1807 and March 1809 provides a second test case. Here, the welfare cost to the United States of the nearly complete embargo on its international trade was estimated to be 5 percent of GDP. This cost, however, does not represent the total gains from trade because trade had already been restricted prior to the embargo Irwin 2002.

The literature on testing and estimating Heckscher-Ohlin models is both voluminous and complex. Moreover, according to a 2008 review by the World Trade Organization most of the empirical work that attempted to test or estimate Heckscher-Ohlin models used inappropriate methods and is therefore largely irrelevant.

In recent years, however, empirical work has been more about accounting for global trade flows than about testing hypotheses related to trade theories. Nonetheless, studies using appropriate methods have shown that if technological differences and home bias are included in the model and if the assumption the prosperity of canada and its side effects an integrated world is relaxed, there appears to be a substantial effect of relative factor abundance on the commodity composition of trade.

The Krugman model employs two basic assumptions, both of which can be readily observed in the real world: With increasing returns to scale also called economies of scalefirms that double their inputs more than double their output. The reason why, at the extreme, economies do not rest on a single firm producing a single product is because consumers prefer to choose from different varieties for each the prosperity of canada and its side effects they buy rather than buy the same one each time.

Thus, each firm has some leeway to set prices without fear that consumers will immediately switch to a competitor for the sake of a small difference in prices. However, while these varieties are not exactly the same, they are substitutes for one another, and each firm continues to face competition from other producers in the industry.

So what happens if two countries, each with identical industry technologies and factor endowments, open up to trade? According to traditional models on country differences, no trade would occur. In contrast, with differentiated goods and increasing returns to scale, trade opening enables firms to serve a larger market and reduce their average costs and gives consumers access to an increased range of product varieties.

However, as consumers can choose among more varieties, they also become more sensitive to price. Hence, each firm can produce a larger quantity than before the trade opening selling to both domestic and foreign marketsbut each must sell their product at lower prices. The gains from trade in such a scenario are threefold.