An Examination of the Small-Open-Economy Hypothesis for Canadian Exports

Does Canada obey the "small open economy" paradigm in its export behaviour? If the small-open-economy paradigm holds, the price of Canadian exports (measured in foreign currencies) is determined by foreign developments with no impact from domestic developments. Also, if the small country assumption is valid, the volume of Canadian exports can be appropriately modeled via a supply curve with its testable implications. This paper is divided into three sections. In Section 1, I discuss the determination of export prices and find that the small-open-economy hypothesis accurately describes Canadian export prices. In Section 2, I develop a model of export volumes relevant for a small open economy and find that the data on export volumes do not support this hypothesis. Finally, in Section 3, I present a calculation related to the "pseudo-small open economy" hypothesis.