Canadian Dollar Essay, Research Paper
The Canadian economy has increased over the last few years with a lower valued dollar. Economists have been debating for decades on whether the Canadian economy would be better off with a lower dollar opposed to a higher valued dollar. The Canadian dollar has been volatile since 1920, and has brought both positive and negative effects to Canadian industries, primarily those involved in trade. Unemployment and interest rates have also faced major changes due to fluctuation, showing similar trends as the dollar since 1920. Although the Canadian economy has increased over the last few years, with a lower valued dollar, would Canada be better off with a higher valued dollar?
Canada s dollar has been unstable for the past several years; however, there has been a recent sharp decline since the early 1990s. Compared to the American dollar, Canada s is currently valued at sixty-five cents. In the beginning of the century; however, the Canadian dollar was not as weak as it is today, there was even a point where it surpassed the mighty American dollar. The value of Canada s dollar remained fluctuated from approximately $1.00 to $1.15 US from the 1920s until end the 1970s, which was where dollar declined rapidly for over eight years, which was about twenty-five per cent. The sudden depreciation was due to forces of declining demand and technology, which made Canadian goods relatively cheaper in world markets. On the other hand, the dollar rebounded following a determined strategy of aggressive involvement in the foreign exchange market and greatly increasing interest rates, the Canadian dollar closed the decade at $0.86 US. Yet, in the 1990s, the dollar continued to decrease due to lowered interest rates and the enormous deficit. Throughout the years, Canada has tried several different monetary systems, along with various different dollar values; however, depreciation did not prove to stutter Canada s economic growth.
Canada is a major participant in international trade, and therefore, the value of its dollar plays a key role. A devalued currency can spark up exports as they become less expensive to other countries. Canadian exporters like the dollar valued at seventy to seventy-five cents American and this, in turn, boosts employment. Moreover, imports become more expensive, so Canadian consumers will purchase more domestic products. However, this is not always the best case-scenario, when consumers stop buying in any particular country, business in general declines. Furthermore, as import prices rise, Canadian producers must pay more for parts and materials they import, many of which cannot be bought in Canada because domestic suppliers do not exist. The recent decline in the Canadian dollar was one of the biggest reasons Canadian goods became so competitive, especially in the United States of America, providing a partial offset to those export sectors affected by falling demand, while stimulating others. However, currency depreciation alone cannot boost Canada s competitiveness in the long run. A higher dollar, on the other hand, would decrease exports, but would allow increased imports. This is good news for consumers and business, except for those involved in the exporting industries, which are particularly sensitive to the fluctuating dollar. A higher dollar would not only raise the price foreigners would have to pay for Canadian goods, but cut the price Canadians would have to pay for imports, which is the source of concern for manufacturers and exporters. Although Canada s role as a trading nation is greatly affected by the dollar, the impact of Canada s currency also plays a vital role in several other sectors of its economy.
The main relationship between the Canadian interest rate the dollar is the demand and supply for the Canadian dollar in the foreign exchange market. The interest rate that can be earned by moving funds to Canada is a key influence on the demand for Canadian dollars. Investors are constantly seeking the highest rate available, and when the interest rate that can be earned in one country rises with all other interest rates remaining the same, investors move funds into that country. However, in order to transfer funds into Canada, investors must first buy Canadian dollars in the foreign exchange market, and thus, if more funds are moving into Canada, the demand for Canadian dollars increases. A boost in the demand for Canadian dollars in the foreign exchange market raises the value of the Canadian dollar. Therefore, a rise in interest rates brings a rise in the in the value of the dollar, and a fall interest rates decreases the value of the dollar. (This is shown in Graph #1) However, interest rates are also affected in another fashion. As the Canadian dollar declines in value, domestic interest rates will generally rise to defend it by attracting more money into Canadian dollar assets such as bonds and treasury bills. The demand of Canadian dollars, in turn, can influence the value and currency; however, interest rates alone cannot determine the prosperity of the economy.
There is a very close connection between employment and trade, and therefore, the Canadian dollar. Protectionist legislation, whether through tariffs or import quotas, raises prices of imported goods. If these goods are raw materials or finished products needed by Canadian companies, the ability of these companies to produce competitively is decreased. By searching to protect one industry, legislation reluctantly damages other industries and their employees. This lowers competitiveness and contributes to unemployment. Thus, extreme protectionist legislation restrains international trade and leads to substantial unemployment. When the dollar is low, exports increase, which boosts demand, and as a result, supply increases in order to keep up; therefore, more jobs would be created due to the need for workers to produce these goods and services. (Graph #2 displays the relationship between the Canadian dollar and unemployment.) In addition, a devalued dollar would attract more foreign investment, and thus, creating more jobs. The rational behind this is that it is less expensive for international investors to produce in Canada, because foreign currencies are stronger when compared to Canada s, which enables them to cut costs. In contrast, a high dollar would have the opposite effect. Exports would decline, which would lower demand, and as a result, companies may have lay off workers due to lost of profits and increased costs. In the late 1980s, the appreciation of the dollar resulted in a net loss of 24,200 manufacturing jobs. Furthermore, foreign investment would decline, and thus, cut down job openings. A higher dollar could mean a lost in several jobs; however, if Canada could sustain its competitiveness, further unemployment could be prevented.
The recent decline in the value of the Canadian dollar in American funds has been creating a great deal of discussion and some alarm. Many see the value of the Canadian dollar as a measure of national performance, some believe that a decline somehow indicates that the economy is not performing up to standard, that Canadian goods can no longer compete in world markets, or that Canada s wealth has in some way decreased.
However, the value of a nation s currency has only a circumstantial relationship to its economic health and vitality. The wealth of a country depends on the amount of real resources it has at its disposal and how efficiently it uses them. High levels of employment, stable interest rates, and international relations are some of the basic ingredients of domestic prosperity. Although the issue is still part of an ongoing debate, the Canadian dollar should be established at a value that would not damage exports, or interest rates, while increasing imports and employment.