Suppose that there is a balance of trade in both the United States and Canada. Then, the U.S. dollar appreciates against the Canadian dollar. What would the likely outcome be?

Question

a trade surplus in Canada

a trade surplus in the United States

a trade deficit in Canada

a trade deficit in both countries

Answer 1

When the U.S. dollar appreciates against the Canadian dollar, it means that the U.S. dollar is stronger and can buy more Canadian dollars. This situation typically has the following implications for trade:

1. U.S. exports to Canada become more expensive: As the value of the U.S. dollar rises, Canadian buyers will find U.S. goods more expensive in Canadian dollar terms, which may lead to a decrease in U.S. exports to Canada.

2. Canadian imports to the U.S. become cheaper: Conversely, Canadian goods become less expensive for U.S. consumers, potentially leading to an increase in Canadian imports by Americans.

As a result of these dynamics, it is likely that the United States would experience a trade deficit (importing more than it exports), while Canada might experience a trade surplus (exporting more than it imports) as it sells more goods to the U.S.

Therefore, the likely outcome of this situation would be:

A trade surplus in Canada.