. rapid urbanisation underpins this growth. since 1990, the number of people living in cities in china and india has risen by roughly 500 million, the equivalent of housing the entire population of canada every 18 months ( chart 3 ). despite the current, sharp cyclical slowdowns in china and india, this secular process can be expected to continue for decades. so, even though history teaches that all booms are finite, with convergence to western levels of consumption still a long way off, the demand for commodities can be expected to remain robust and prices elevated. in canada, the impact of rising commodity prices has been reinforced by strong growth in the supply of some commodities. oil is now our most important commodity by value ( chart 4 ), with its share rising over the past 15 years from 18 per cent to 46 per cent of total canadian commodity production. the declining importance of manufacturing coinciding with this period of elevated commodity prices, the share of the manufacturing sector in canadian gdp has declined since the turn of the century from 18 per cent to around 11 per cent. for the promoters of dutch disease, this is the “ a - ha ” fact, with the coincidental relationship described as causal. with a broader view, however, it is evident that the decline in manufacturing is only partially in response to the rising exchange rate and, in fact, is part of a broad, secular trend across the advanced world ( chart 5 ). major forces of globalisation and technological change have dispersed manufacturing activity across borders, increasingly concentrating the highest value - added stages of production in advanced economies. in 1970, canada ’ s manufacturing - to - gdp ratio was 6 percentage points below the average of members of the organisation for economic co - operation and development ( oecd ). today, it is 3 percentage points behind. likewise, the share of jobs in manufacturing has declined, but not as steeply as it has in our commodity - importing neighbour to the south ( chart 6 ). although the adjustment has been difficult, it has occurred over a longer period of time than the boom in commodity prices and, in general, canada has not lost ground relative to other advanced economies. bis central bankers ’ speeches what drives the currency? the coincident strength of commodity prices and the canadian dollar in recent years has been treated by some as prima facie evidence of dutch disease in canada. but this diagnosis ignores the fact that the canadian dollar is influenced by a diverse set of factors. commodity prices do play a role

underlying inflation is largely offset by an appreciation of our exchange rate. this helps limit the direct impact of higher commodity prices on the prices all canadians pay for food, gas and other commodity - intensive goods. when commodity prices increase, revenues from the resource sector spread through the canadian economy via three channels : fiscal redistribution, especially by the federal government ; personal wealth increases, through income and ownership of stock ; and interprovincial trade. it is important to recognise that, for almost all the provinces, trade inside canada has grown fast enough to offset a significant portion of the declines in international trade. central canada, for instance, suffered a real decline in international exports of $ 18 billion between 2002 and 2008, which was almost entirely offset by increases in interprovincial exports of $ 16 billion. some of this reflects increased sales to western canada from central canadian machinery makers, primary metal producers, and chemical companies. much of the gains in interprovincial trade volumes were in services rather than goods, which was where most of the declines in international exports occurred. well - paid services, such as professional, mining, and financial services, play a significant role in increased trade between central canada and alberta ( charts 12 and 13 ). improving canada ’ s economic health recognising that higher commodity prices are good for the canadian economy does not mean that policy has no role. the first objective of policy, of course, should be to do no harm. this brings me to the exchange rate. modelled as an increase in u. s. potential output. bis central bankers ’ speeches should the bank lean against the exchange rate? some have argued that the bank of canada could improve welfare by leaning against commodity - driven movements in the nominal exchange rate. it is important to remember that with changes in the terms of trade, adjustments will follow. it is only a question of how. our floating exchange rate helps to achieve the appropriate adjustments without forcing very difficult changes in the overall levels of wages, output and prices. we can use totem to simulate the effect of the bank leaning against a commodity - driven exchange rate appreciation through a reduction to the policy rate. in the short run, stabilising the nominal exchange rate helps to support non - commodity exports as well as canadian producers who face competition from imports. but, ultimately, this effort is futile. over time, wages and inflation rise, causing the real exchange rate to appreciate. non - resource exporters are faced with the same competitiveness challenges as they are