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Canadian Dollar = US Dollar… Now What???

September 30, 2007

What does this mean for the US/Canadian economy?

Well, at the end of the day, the answer is complicated. Depending on who you talk to and what school of thought you believe in, answers can vary. However, I believe that parity will hurt the Canadian Economy for a couple of reasons:

1) Canada’s Goods are now Expensive:

The US is Canada’s biggest trade partner. Now that both dollars are equivalent in value, Canadian goods aren’t as cheap as they used to be for Americans. The US buys more from Canada than any other country does. Now that Canadian goods are more expensive, US buying patterns may change to the dismay of Canadians.

2) Canadian Labor is now Expensive:

What about all the American factories that currently exist in Canada? Now that Canadian Labor is more expensive, it may not be as logical for the factories to keep their doors open in Canada.

3) American Goods are now Cheaper:

You mean I can cross the border and buy an IPhone for $400 CAD? Sign me up 🙂 Now that Canadians have more purchase power in the US, cross border shopping will become even more attractive to them.

4) Vacation in Canada is now Expensive:

Americans used to love coming to Canada for vacation as they could get the same quality vacation for a 30% discount. Now that the discount is not there, the incentive for traveling to Canada is also gone.

Ok, so that was one way to look at it…

What about Supply and Demand?

Well, according to classical supply and demand theory, there was more demand for the Canadian Dollar in comparison to the US Dollar in the last little while and that is why the price of the Canadian Dollar has increased. This basically means that the Canadian Dollar is strong and interest in Canadian products is plenty. In order to buy Canadian products/services, one must use the Canadian Dollar. Hence, the more Canada exports in comparison to its imports, the more the demand for its currency should rise. So, it could also be argued that the Canadian Economy is in good shape and that is why the value of the Loonie has gone up… But, to be honest, I think that traditional economics forgets about its adversary: politics. Yes, there is a lot more involved than I think the public will ever come to know about.

Any thoughts?

Aydin.

Posted By: Aydin Mirzaee
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