Feature article.

The terms of international trade have a major effect on Canada's economic performance. They directly affect the nominal trade balance, which reflects not only the volume of trade flows but also their prices. Indirectly, changes in the terms of trade also influence the composition of domestic demand through their impact on prices and profits in different sectors. This paper looks at the reasons for the recent sharp shift in Canada's terms of trade and its impact on different sectors of the economy. It also looks to the recent American experience with a sharply rising dollar as a guide to how different sectors of the economy could gain or lose from these changes. The focus of this article is not on the overall net effect, which is likely to be small, but on the distributional effects, which have already been considerable.