Link between the Canadian and American Economies

Paper Summary:

This paper discusses the spread of the global economy and the greater dependence that the Canadian economy now has on the United States economy. It discusses the foreign investment markets for Canada and looks at the view of the United States with regards to it current account deficit. Finally the paper lists some of the actions that the United States can take for which Canada must be prepared.

From the Paper:

"While many analysts predict a fairly painless global adjustment once the US current account seeks a more equitable balance, the increasing uncertainty in the market seems to betray a growing fear of a sudden and profound systemic shock. Researchers point out that the US is currently the greatest investment vehicle for most of the world's leading economies with its current account deficit standing at -22% of GDP (The 1). Yet, framing the current account in this manner does not accurately represent the true disparity in the US economy as opposed to those of its foreign counterparts such as Canada. The US basically considers deficits normal between most of its trading partners and this is definitely the case with Canada. However, this gap is even more severe when examined in relation to specific countries such as China that have created an export economy through the financing US spending: "The United States runs a current account deficit of more than $600 billion per year...foreign central banks...have made substantial purchases of U.S. government bonds to add to their foreign exchange reserves" (Clarida par.3)."

Sample of Sources Used:

• Ayd, Ali Al-, Ray Barrell, and Olga Pomerantz. "Dollars and Deficits-The US Current Account Deficit and Its Exchange Rate Consequences." National Institute Economic Review (2005): 31+.
• Clarida, Richard H. "Japan, China and the U.S. Current Account Deficit." The Cato Journal 25.1 (2005): 111+.

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