Saturday, January 23, 2016

How Falling Commodity Prices Affects Commodity Exporting Economies Like Russia And Canada

Slow growth in Europe and China has reduced demand for natural resources.  Oil exporting nations have been particularly hard hit.  The supply of oil has increased as demand for oil has fallen.  That has the predictable result of lowering the price of oil.  The Russian economy is heavily dependent upon energy exports.  The government derives around half of its revenue from the export of oil and gas.  Falling prices mean less government revenue, which affects citizens dependent on government salaries and subsidies.  Falling exports has also reduced the value of the ruble.  That increases the real cost of imports.  Consequently,  the Russian economy is suffering from high inflation during a period of high unemployment and falling wages.  Ordinarily, nations in recession experience price deflation.

The Canadian economy is also dependent upon the export of commodities like oil.  Falling oil prices have had a similar effect on its economy.  Revenue from commodity exports has declined and the relative value of the Canadian currency is around 40% lower than the US dollar than it was when oil and other resources were in greater demand and fetched higher prices.  That has increased the price of imports, like fresh vegetables, but it has also made some of Canada's exports more price competitive.  Unlike Russia, whose economy has also hit by sanctions, the decline in the value of the Canadian dollar has boosted demand for travel in Canada and increased demand for many of its exports.  The Canadian economy is in much better shape than the Russian economy.

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