TRADE SURPLUS Exports exceed Imports. X – M > 0 Americans spend more on our goods than we spend on theirs. (If we have a surplus with them, they have a deficit with us.) Rising commodity prices, such as the rise in oil prices often create a trade surplus in Canada.

TRADE DEFICIT Imports exceed Exports X – M < 0 Americans spend less on our goods than we spend on theirs. (If we have a deficit with them, they have a surplus with us.) We are more likely to have a trade deficit when commodity prices are low. Bad markets for transportation equipment also reduces our exports.

Lending during a Trade Surplus If exports are greater than imports, we lend to foreigners. Americans spend more on our goods than we spend on theirs. As a result they want to sell a larger value of US$ to buy CDN$ in order to buy Canadian goods and we want to sell a smaller value of CDN$ to buy US$. If the Canadian trade surplus was $2 billion, then Americans want to sell $2 billion more US$ to buy CDN$ to buy Canadian goods than we want to sell to them to buy American goods When a trade surplus occurs, Americans want to sell more US$ to buy Cdn$ than Canadians want to buy in order to purchase American goods. Americans spend more on our goods than we spend on theirs. We invest the difference in their financial markets We can’t use US$ in ours, and more US$ are available than Canadians want to buy US goods

Borrowing during a Trade Deficit If imports are greater than exports, we borrow from foreigners –Americans spend less on our goods than we spend on theirs – We need more US$ to buy US$ goods than we receive from selling Americans Canadian goods. When a trade surplus occurs, Americans want to sell more US$ to buy Cdn$ than Canadians want to buy in order to purchase American goods. Americans spend more on our goods than we spend on theirs. –Americans invest the difference in our financial markets They can’t use Cdn$ in theirs, and more Cdn$ are available than Americans want in order to buy Cdn goods

International Lending Decisions to lend to another nation may often cause a trade surplus. In the 1990s Canadians wanted to invest in US stock markets. They sold Canadian dollars to buy US dollars to buy US stocks. The Canadian dollar fell to $.63 A cheap dollar led to cheap exports and exports rose while imports fell

International Borrowing Decisions to borrow from another nation may often cause a trade deficit. One factor causing the Cdn$ to rise was the decline in the American stock market and the good performance of the Canadian market. People bought Cdn$ to buy Cdn stocks and drove the price up. A more expensive dollar has led to more expensive exports. Manufacturing exports were hurt by the rising dollar, so those exports fell.