Understanding Gross Domestic Product and its relation to imports and exports

What is Gross Domestic Product and how is it calculated?

Countries measure the health of their economies in many ways such as unemployment rates, consumer confidence, and Gross Domestic Product (GDP). Gross Domestic Product is a measurement of the amount of goods produced by a country in one year. If that number increases, our economy is growing, whereas a decrease would indicate a shrinking economy. To calculate expenditure GDP we add up all of the groups who buy goods in the economy (GDP = C + I + G + Xn). The variable ‘C’ stands for consumption, or consumer spending. The letter ‘I’ is the variable for investment or business spending. ‘G’ is the variable for government spending. Finally, ‘Xn’ is the variable for ‘net exports’ which is calculated as exports minus imports. To reiterate, we have calculated expenditure GDP by adding together spending by the four groups that buy goods and services; consumers, businesses, government and the foreign sector.

 

Exports (X) are when one country sells goods or services to a different country. If Canada sells beef to Japan, that would be an export. If the US buys natural gas from Canada, that would also be an export. Imports are when consumers, businesses or government in Canada buys goods or services produced in a different country. When Canadian consumers buy French wine, that would be an import. When the Canadian government buys helicopters manufactured in the U.S., that would also be an import. Services can be a bit trickier. If a tourist comes from India to Canada is that an import or export? The simplest way to determine if a transaction is an export or import is to follow which direction the money goes. If money comes to your country, it is an export. If money flows out of your country, that would be an import. In the tourist example, the money would flow into Canada (as the tourist spends money in Canada) therefore it would be an export for Canada (money flows in) and an import for India (money flows out).

 

Therefore, changes in both imports and exports would affect GDP. If exports increase, net exports (Xn) would increase, and thus GDP would increase. If imports increase, net exports would decrease (Xn = X – IM), causing GDP to go down. Therefore, exports are good for a countries economy and imports are detrimental. 

Globalization has resulted in the inter connectivity of countries. Canada is interested in who they export to as those exports improve our economy. The amount a country buys from Canada depends on a number of factors including how healthy the economy is of our trading partner.

 

Another factor that will influence the dollar value of imports and exports are the trade agreement that Canada has with other nations or trading blocs. Our trade agreement with the U.S. and Mexico (USMCA) has the biggest impact on our economy, primarily because those two countries are our closest neighbours. Canada has other bilateral trade agreements in force with other countries, including South Korea, Colombia, Chile, Costa Rica, Israel, Honduras, Jordan, Panama, the European Free Trade Association (EFTA) as well as the Ukraine.Trade data for Canada and a number of its top trading partners is displayed on the following page (source: https://tradingeconomics.com/canada/exports-by-country). 

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1.Net exports is calculated by subtracting imports and exports. What factors would affect net exports?

2.A country can calculate its trade balance with another country by subtracting imports from that country from exports to that country.  A trade balance can also be calculated for a country in comparison to the rest of the world. What is the trade balance between Canada and the U.S.? Canada and China? Canada and Mexico? Conduct some research and determine the trade balance between Canada and the rest of the world.

 

3.The world is more interconnected than ever before. Even though Canada does not have a large trade volume with India (exports to India of $3.31B and imports of $3.96B), one of Canada’s main trading partner, China, does have a healthy trade volume with India. Why would Canada be concerned about the health of India’s economy?

4.Canada has a number of trade agreements with countries and trading blocs around the globe. How do trade agreement foster increased trade?

Sources
https://tradingeconomics.com/canada/exports-by-country; Trading Economics
http://www.farrow.com/article-canadas-current-free-trade-agreements; Farrow
https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/index.aspx?lang=eng.