APS-003: The Impact of Higher Commodity Prices on Canada’s Trade Balance

Samad Uddin, Office of the Chief Economist, DFAIT
June, 2006

Executive Summary

Commodity related sectors are carrying a greater weight in Canada’s trade balance due to their recent price hikes. The objective of this report is to calculate the impact of changes in commodity prices on Canada’s trade balance.

Three price scenarios were used to compute the results using a simple accounting method. Amongst the three price scenarios, the base-case scenario, in which prices of commodities grow inline with the wholesale price index (WPI) revealed that the commodity sector will contribute to over $110 billion to the merchandise surplus by 2010. In the low-price scenario, prices were lowered by 20% resulting in a contribution of $88.8 billion to the surplus, while in the high-price scenario where prices were increased by 20%, commodities will contribute $133 billion. In all three scenarios energy continued to contribute to the largest share in the surplus ranging from $43.6 billion to $65.4 billion followed by industrial metals ($23.8 billion to $35.6 billion) and forestry products ($21.4 billion to $32.1 billion).

Although Canada is a developed and industrialized economy, it continues to rely on commodities for its surpluses. This not surprising due to the fact that Canada has abundance of natural resources combined with an increase in an appetite for commodities in the global market, especially in the emerging economies.

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