Analysis of Canada's Economic Performance

This assignment is a comprehensive analysis of Canada's economic performance, covering various aspects such as trade, GDP, inflation rate, and foreign tax credits. The report highlights the country's significant wheat exports, its participation in international organizations like the Commonwealth, and its financial market structure. Additionally, it discusses the Bank of Canada's monetary policy decisions, including interest rates and inflation control measures. The analysis is based on various sources such as government reports, economic data, and academic research papers.

International
Trade
Finance and
Investment
REPORT

CONTENT PAGE
1. Executive Summary………………………………………………………………………………………………………………3
2. Background of Financial Markets………………………………………………………………………………………….4
3. Capital Allocation within Domestic Economy……………………………………………………………………. 5-6
4. Capital Allocation within International Markets…………………………………………………………………6-8
5. Evaluation of an Economy of your choice………………………………………………………………………………8
6. Critical Evaluation of Challenges that the country faces due to Industrialisation and Trade
Policies………………………………………………………………………………………………………………………………8-9
7. Conclusion…………………………………………………………………………………………………………………..………10
8. Recommendations……………………………………………………………………………………………………..……….10
9. References……………………………………………………………………………………………………………………..10-11

Executive summary
In this report I will be identifying, evaluate, analysing and reviewing information on the Canadian
economy this is to provide prospective clients on the international trade, finance and investment.
The reports will be based on the background of financial markets and why It is necessary as well as
the capital market, Capital Allocation within Domestic Economy, Capital Allocation within
International Markets, Evaluation of an Economy of your choice and Critical Evaluation of Challenges
that the country faces due to Industrialisation and Trade Policies.

Background of Financial Market
Financial market is a place for the exchange of assets (Henning, Pigott, Scott, 1975, p. 2). Financial
markets play a vital role in allocating funds to economic activities it relates to a broad area to
achieve the highest rate of return for businesses and entrepreneurs. (Financial market,2009)
Financial markets refer to any marketplace where the trading of securities occurs, including the
stock market, bond market, forex market, and derivatives market. Financial markets create securities
products that provide a return for those who have excess funds and make these funds available to
those who need additional money. (Kenton.W,2020) Financial market can be summarised as
currency issue and return; deposit absorb, withdraw, loan disburse, foreign exchange trading,
securities issue, transfer, insurance, trusts, domestic and international monetary settlement. (John,
G. & Edward, S. 1960) Financial markets can be divided in money market and capital market. Money
markets are short-term trading debt securities and capital markets are medium or long-term trading
securities.
Financial intermediaries are the units of economy that absorb money from economic agents with a
surplus fund and transfer it to economic agents with a deficit and provide various kinds of financial
services. The main functions of financial intermediaries are credit creation, settlement of payment,
the distribution of resources, information provided and risk management. It has been divided into
two parts (John Gurley and Edward Shaw, 1960) There are four main financial intermediaries;
Deposit institutions can take deposits from units in economic agents with a surplus fund and lend
the money gathered to economic agents in deficit. Insurance companies are non-deposit institutions
which can gathering funds from insurance applicant and invest them in the capital markets. Unit
trusts are non-deposit financial institutions they invest in the equity and bond markets using the
money raised from the public. Pension funds is an asset pool that employees put their money for
retirement. Funds are gathered by employers and handed over to pension funds. Financial markets
and financial intermediaries can facilitate the transfer of funds from surplus to deficit units.
Borrowers and lenders have a need for financial markets because of its two functions, pricing
function and discipline function. (Hans Wijkander, 1992) thought that the main reason why financial
intermediaries exist is a result of asymmetric information and expensive information products.
It is mainly through the financial markets that the Canadian Bank's key policy rate influences interest
rates and the exchange rate. This helps the Bank achieve its monetary policy objectives. The Bank is
also involved in financial markets through auctions of government securities. On rare occasions, the
Bank may also intervene in the foreign exchange market on behalf of the government to promote
orderly markets for the Canadian dollar. The Bank conducts wide-ranging research to strengthen its
understanding of the structure of the Canadian financial system and to identify how the Bank can
encourage the development and stability of Canadian markets. The Canadian money market has
substantially broadened in 1954 with the introduction of day-to-day bank loans against Government
of Canada treasury bills and other short-term government and government-guaranteed securities.
Government of Canada bonds and Government of Canada guaranteed bonds are issued at less
regular intervals. Money Market investments are ways for governments and corporations to raise
capital. These short-term investments have a fixed rate of return held to maturity. Money market
investments are sold at a "discount" to the “par" (maturity) value. The difference between the
discounted price and the par value amount is the interest received on the investment. RBC Capital
Markets is innovative, trusted partner with an in-depth expertise in capital markets, banking, and
finance. RBC Capital Markets is part of a leading provider of financial services, Royal Bank of Canada
(RBC) has been Operating since 1869.

Capital allocation within domestic economy
A fundamental job of the economy is to allocate capital efficiently. Capital is supposed to be invested
in the sectors that are expected to have high returns and be withdrawn from sectors with poor
prospects. Economists have suspected that formal financial markets and associated institutions
improve the capital allocation process and thus contribute to economic growth. Efficient secondary
market prices help investors distinguish good investments from bad ones through a mechanism like
Tobin's Q. Developed financial markets, are measured by the size of the domestic stock and credit
markets, are associated with a better allocation of capital. (J. WURGLER,2000)
Canada GDP is $1.736 trillion in 2019 (World Bank, 2021) ranking Canada as the 10TH biggest
economy (SILVER.C, 2020). The main imports Canada have been refined petroleum, gold, coffee,
silver, delivery trucks, computers and aluminium. (commodity.com,2021) Canada being the 12th
largest product export economy in the world. Five most exported commodities are crude petroleum,
gold, wheat, aluminium, rapeseed and vehicle parts. Canada being the fourth largest crude oil
exporter in the world with 6.19%. (commodity.com,2021) Canada currently has a negative trade
balance of $62 billion CAD: imports total of $369 billion and $431 billion. (commodity.com,2021) in
Canada they have free trade agreements, such as the Canada-European Union Comprehensive
Economic and Trade Agreement, Comprehensive and Progressive Agreement for Trans-pacific
partnership and Canada- United States- Mexico Agreement (GA,2020)
The concept of purchasing- power parity has two definitions; originally it was an exchange rate
determination but now it’s primarily used to compare living standards across countries. The
Canadian dollar is undervalued because its current market value is below the purchasing- power
parity exchange rate calculated by the organisation for economic co-operation and development. In
2019 Canada’s nominal GDP was CAN $2.3 trillion and there PPP-adjusted per capita GDP was about
US $50,600. In 2020 the per capita changed by -7.07%. unemployment rates are 9.7% (Knoema. n.d)

The success of Canada's monetary policy is inflation; the rate of change of consumer prices has
reflected in the consumer price index. Real-world institutions are very slow to incorporate the kind
of adjustment to inflation that this academic argument requires (Friedman 1977). Canada tends to
be even less stable when its average level is higher. High inflation is typically volatile and therefore
difficult to predict, and this uncertainty generated by inflation is the real problem because it leads
households and firms to make decisions that they would be unlikely to make in a more certain, low-
inflation, environment (Stuber 2001). Canada appears at average annual inflation of 4.6 per cent and
the standard deviation of inflation equal to 3.2 per cent (Bankofcanada.ca. n.d) The Bank of Canadas
has no plans of changing their benchmark interest rate until inflation gets back to two per cent
leaving inflation rate at 0.25 per cent. (Evans, P., 2020)
Capital allocation within international market
Allocating capital internationally involves investing in both emerging markets and developed
markets. The way a fund's capital is allocated determines its cost, risk, and return. Investing in
emerging markets can be carried out in a number of ways including purchasing financial assets
directly from the domestic stock market, gaining access by means of "country funds" which have
their financial assets held by deposit institutions or buying financial assets of a specific emerging
country directly from international markets. Emerging markets are less institutionalized than
developed markets it must be accounted for by funds considering global diversification of
investments. Investing in emerging markets for a fund usually depend on the return/risk trade-off.
The tax rate in Canada in 2021:
15% on the first $49,020 of taxable income,
20.5% on the portion of taxable income over 49,020 up to $98,040), plus
26% on the portion of taxable income over $98,040 up to $151,978),

29% on the portion of taxable income over 151,978 up to $216,511),
33% of taxable income over $216,511
The cooperate tax rate in Canada is currently at 26.50
Canadian residents earning foreign-sourced income incur double tax if the source country also taxes
that income. The resulting double taxation might discourage taxpayers from pursuing productive
investments abroad. Two types of foreign tax credits: foreign taxes on business income and foreign
taxes on non-business income. Computing FTCs for foreign taxes on non-business income—i.e.,
foreign tax levied on employment income, capital gains, dividends, interest, rent, and royalties.
Computing FTCs for foreign taxes on business income—i.e., foreign tax levied on income from
business operations in the foreign country. (TaxPage.com. n.d.)
The value of the Canadian dollar rises or falls according to how much people in foreign exchange
markets want to buy and sell it this is how it makes it float what makes it float. The Bank of Canada
doesn’t try to set the dollar’s exchange rate. It leaves the markets to set its value. The Bank of
Canada lets the Canadian dollar float, the focus is on setting interest rates to maintain inflation at 2
per cent in Canada. Demand for the dollar is affected mainly by demand for Canadian goods and
services, the more people want to buy what they sell, the more the Canadian dollar is worth. The
strength of the economy affects the dollar’s value. Some specific factors that can make the dollar go
up or down: (Bankofcanada.ca. n.d.)
Interest rates relative to other countries
Inflation rates relative to other countries
Demand for financial assets, like stocks and bonds
The modern Commonwealth is an association of 54 countries, most with historic links to the United
Kingdom and home to over 2 billion citizens.
Canada first joined the British Commonwealth as an independent state in 1931. The modern
Commonwealth came into existence in 1949 with the London Declaration, and Canada has played an
important role in its evolution.
The mandate of the Commonwealth is to serve the needs of its member governments and their
citizens in political, economic and social development. The Commonwealth also provides a forum for
deliberation, problem solving, consensus decision making and action on matters of importance to
the organization.

The Commonwealth sees itself as an advocate for small and vulnerable states, helping to strengthen
their resilience and inclusion in the global order. The theme for 2020 is ‘Delivering A Common
Future: Connecting, Innovating, Transforming’. Five sub-themes have been identified for discussion:
Governance and Rule of Law, ICT and Innovation, Youth, Environment, and Trade.
Canada is a top donor of the Commonwealth and contributed a total of $10.39 million to the
organization in 2019-2020. (GAC. n.d.)
Evaluation of the Canadian Economy
Canada is the second largest country in the world. It borders the United States to the
south, and the US state of Alaska to the north-west. The economy of Canada is a developed market
economy. It is the 10th largest GDP by nominal and the 15th largest GDP by PPP in the world. The
country's economy is dominated by the service industry. Canada has the third highest total
estimated value of natural resources valued at $33.2 trillion in 2019. It has the world's third largest
proven petroleum reserves and is the fourth largest exporter of petroleum and natural gas. Canada
is considered an energy superpower due to its abundant natural resources. Canada is one of the
least corrupt countries, the world's top ten trading nations, with a globalised economy. The
country's average household disposable income per capita is above the OECD average. The Toronto
Stock Exchange is the eighth-largest stock exchange in the world by market capitalisation.
Agriculture and mining accounted for less than 5 percent of Canada’s labour force, while
manufacturing is 1/5 and services, including transportation, trade and finance. Canada supports its
manufacturing industries through protective tariffs on imported manufactured goods. Canada’s
economy is dominated by the private sector, though enterprises (e.g., postal services, electric
utilities, and transportation services) that have remained publicly owned.
Growth is moderate, rates slowing to about 1.5%. The slowdowns are due to reduction in business
investment and exports, and a decline in energy-sector investment. Deficits are moderate, and the
GDP ratio is low by international standards and falling. However, household debt levels remain high,
and rising healthcare costs. Employment rates remain a concern particularly among the population.
Labour market regulation is relatively light, although regional unemployment benefits and high
urban living costs may reduce labour mobility. Another factor is the country’s dependence on
natural resources, which account for roughly 20% of GDP. Household debt levels remain high. The
current ratio of household debt to disposable income in Canada is above 177%, and housing
affordability continues to decline. The unemployment rate in Canada is primarily driven by the
business cycle, which reflects aggregate demand conditions. Labour-market policies and programs
such as unemployment insurance and training programs have limited effect on overall
unemployment, although these policies and programs are important for income support and the
upgrading of skills. Canada’s unemployment rate reaching low of 5.9%. The income-tax system is
reasonably progressive and continues to be useful in equalizing after-tax incomes for lower income
brackets. According to the Conference Board of Canada, there are now almost 200 tax breaks for
federal income-taxpayers, resulting in an estimated CAD 100 billion of foregone tax revenue
annually.
Critical Evaluation of Challenges that the country faces due to Industrialisation and Trade Policies.
Canada has an over-reliance on natural resources which are unevenly distributed leading to the
unequal growth. The exploitation of natural resources has had an adverse effect on the environment
including the decline of cod fish and salmon as well as forest cover. Oil exports account for a larger
share of GDP in Canada than they do in any other nation. Apart from Canada, Norway, or Denmark,
every developed economy in the world is actually a net importer of oil. Canada is the world’s 10th

largest net exporter of oil. None of Canada’s most important trade partners are likely to be among
the main beneficiaries of falling oil prices. Canada has one primary trade partner, which is the United
States, and three secondary trade partners: China, Mexico, and Britain. The US accounts for more
than half of Canadian trade, while China, Mexico, and Britain combined account for close to 20
percent of Canadian trade.
The impact of the COVID-19 pandemic on the relative prices of goods are likely to be minimal but
there is a potential for it to have a negative effect on the economy, because the Canada-US border
remained open for trading purposes. The relative prices of services, such as health care and
education are stable. Purchasing power parities between Canada and the US are expected to remain
similar.
There is various different challenges Canada may come into contact with:
High tariffs for certain products
Import licensing requirement
Trade protection
Energy policy
Higher US interest rates
Lower taxes
infrastructure investments
Restriction on selling to the government of the country
Double taxation is a threat resident wouldn’t want to buy products knowing they will be taxed more
than once

Conclusion
To conclude this report there is in depth information that will give the understanding of why
investigating into going into a specific international trade, finance and investment matters. Hoping
this report gives you all the information that is required to make you want to make an investment
into Canada as it is a free trading country which is a bonus for import and exporting of goods. Even
though there are various disadvantages that arises everything has threats that can affect business
decisions. Canada will need to look into outsourcing the products that cost high tariffs to different
countries that can offer better services.
Recommendations
Canada should look into their trade protection plans and make sure countries are not being denied
what they need as well as the double taxation they have this has probably had a downfall on the
business many investors may have been interest in going to the country but have be forced away
due to them not being able to get as much out of the country.
Reference:
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<https://www.bankofcanada.ca/2020/08/understanding-exchange-rates/> [Accessed 8 January
2021].
TaxPage.com. n.d. Foreign Tax Credits Canada | Section 126 | Income Tax Act. [online] Available at:
<https://taxpage.com/articles-and-tips/foreign-tax-credits/> [Accessed 6 January 2021].
Evans, P., 2020. Bank of Canada plans to keep interest rate near zero until 2023 | CBC News. [online]
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[Accessed 17 January 2021].
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January 2021].
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