In this article, David Parkinson reports on the factors that caused Canada’s trade deficit to shrink in March. This lesson plan seeks to highlight the factors that caused the shrinkage and examine its implications.

Appropriate Subject Area(s):

Economics.

Key Questions to Explore:

• What factors caused the trade deficit to shrink in March?
• What are the implications of a trade deficit?
• Is the rise in demand for Canadian goods sustainable?
• What effects could Mr. Trump’s protectionist policies have on the Canadian economy?

New Terminology:

Deficit, protectionist policies.

• A trade deficit is a negative balance of trade in which a country’s imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets.
• Protectionist policies restrict or restrain international trade. Their goal is usually to protect local businesses and jobs from foreign competition. Protectionist policies may come in the form of tariffs, quotas, or subsidies/tax cuts granted to local businesses.

Materials Needed:

Copies of the article.

Introduction to lesson and task:

Canada’s trade deficit in March shrank to $135 million, down from $1.1 billion in February. The reduction was mainly due to a weakened Canadian dollar, an increase in energy commodity prices and a stronger U.s and global economy.

In simple terms, a trade deficit simply means Canada is buying (importing) more than it is selling (exporting) in a given period. A trade deficit, in a given period, has a negative impact on a nation’s annual GDP. However, this is not necessarily a bad thing if the imports are primarily for capital goods.

For example, economists noted that the March trade data show strong gains in imports of industrial machinery and equipment to Canada. This shows that Canadian companies are starting to increase business investments in expanding their operations, which will have a positive impact on GDP in the long run.

Going forward, for the decline in trade deficit to continue the global economy and the U.S. must continue to perform strongly, and the Canadian dollar must continue to trade at a low value in the foreign exchange markets. However, the Trump administration’s proposed protectionist policies continue to pose a major threat to Canada’s economic outlook.

It is important to let your students understand the negative effects of a trade deficit, as well as the positive impacts a trade deficit could have in the short- and long-term.

Action (lesson plan and task):

Engage your students in a discussion about the factors that lead to the trade deficit shrinking to near zero.

• Ask your students to state the factor(s) that led to a trade deficit of near zero for the month of March. (Surge in demand of Canadian goods).
• Ask your students to explain why there was an increase in demand for Canadian goods. (Weak Canadian dollar, improved energy commodity prices, increased demand for Canadian coal, a stronger U.S. and global economy)
• Ask your student to state the factors that affect foreign exchange rates. (Relative economic performance, inflation, interest rates, speculation, Government debt levels, etc.)
• Ask your students to state the potential effects the following events could have on Canada’s trade balances in the coming months:
  • A depreciation in value of the Canadian dollar. (All things being equal, a depreciation in the value of the Canadian dollar will have a positive impact on Canada’s trade balance as imports will become more expensive, and exports will be cheaper for foreign buyers.)
  • An appreciation in the value of the Canadian dollar.
• In the first quarter, Canada had a trade deficit of $1.1-billion because growth in imports (up 2.6%) outpaced growth in exports (up 1.7%). Ask your students to explain the implication of this occurrence:
  • Ask your students to explain why this should be a cause for concern for the Canadian government. (It leads to a reduction in GDP.)
  • Ask your students to explain why some economists believe this to be a good omen. (The deficit was partially caused by an increase in imports of machinery and equipment).
• Canada’s merchandise trade deficit shrank unexpectedly to $135 million in March mostly due to an increase in the nominal value of energy exports as a result of rising oil prices.
  • Ask your students to state the effects President Trump’s protectionist policies could have on Canadian trade balance in the coming months.

Consolidation of Learning:

• A Canadian dollar has been hovering around 0.74 US dollars on the foreign exchange markets.
  • Ask a group of students to research the factors that led to this exchange rate. Ask this group of students to present their findings to the rest of the class
  • Ask another group of students to state the effects this exchange rate has on trade between both countries.

Success Criteria:

• After completing this lesson plan, your students should have a better understanding of the current state of the Canadian economy and they should also have an informed outlook on the risks and opportunities ahead.

Confirming Activity:

• Ask your students to research the industries that are most likely to be affected by President Trump’s protectionist policies. (Softwood lumber, livestock exports, etc.)