Consider Canada as a small open economy in the LR model and that Canada is a major exporter of primary products.

a.Define terms of trade and explain how the terms of trade is to be distinguished from the real exchange rate. Use the Canadian context to illustrate your answers.

b.During the period from 1970s to late 1990s, world real commodity prices were reducing. Explain why, as a result, Canada's terms of trade was negatively affected. Also, explain why such worsening of terms of trade implies that autonomous net exports for Canada reduces (<0). Illustrate graphically using the "foreign exchange" market and explain how such a reduction in autonomous net exports will affect equilibrium net exports and the Canadian dollar value. How will Canada's exports of primary products be affected in equilibrium? How will Canada's exports of manufacturing products be affected in equilibrium? Explain.