Net Exports and International Finance
1. The International Sector: An Introduction
Case in Point: Canadian Net Exports Survive the Loonie's Rise
Throughout 2003 and the first half of 2004, the Canadian dollar, nicknamed the loonie after the Canadian bird that is featured on its one-dollar coin, rose sharply in value against the U.S. dollar. Because the United States and Canada are major trading partners, the changing exchange rate suggested that, other things equal, Canadian exports to the United States would fall and imports rise. The resulting fall in net exports, other things equal, could slow the rate of growth in Canadian GDP.
Fortunately for Canada, "all other things" were not equal. In particular, strong income growth in the United States and China increased the demand for Canadian exports. In addition, the loonie's appreciation against other currencies was less dramatic, and so Canadian exports remained competitive in those markets. While imports did increase, as expected due to the exchange rate change, exports grew at a faster rate, and hence net exports increased over the period.
In sum, Canadian net exports grew, although not by as much as they would have had the loonie not appreciated. As Beata Caranci, an economist for Toronto Dominion Bank put it, "We might have some bumpy months ahead but it definitely looks like the worst is over. … While Canadian exports appear to have survived the loonie's run-up, their fortunes would be much brighter if the exchange rate were still at 65 cents".