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The trade dispute between China and the US has left some fearing a global slowdown and...

The trade dispute between China and the US has left some fearing a global slowdown and perhaps a world-wide recession. If the latter occurs, the Canadian economy will certainly experience a recession. What would you expect to happen to Canadian real national income and its growth rate over the next few quarters? What is likely to happen to the output gap? the unemployment rate? Briefly explain.

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With a trade dispute between China and US, the spillover effects of the dispute will be felt in Canada as well. With US putting trade restrictions on Chinese products, the American buyers would start looking for next best substitute goods to Chinese goods. Since Canadian goods stand to be a good substitute to Chinese goods, just the prices are higher for the former; the demand for Canadian goods will increase (by Americans). With free trade agreements signed between US and Canada, the US would not impose trade restrictions with Canada and thus Canadian products would flow freely to US Thus, as a result of this trade dispute between US and China, Canadian real national income would increase, its growth rate would increase (since its production would increase). Resultantly, unemployment would fall as more workers would now be needed to meet the high demand and thus output gap would shrink down.

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