can be re - opened fairly quickly, regulatory requirements and the time it takes to build infrastructure mean that it can take more than a decade for a new mine to go from exploration to production. thus, the rise in potential output from this latter source will occur slowly. modeling changes in the terms of trade the bank's interest in understanding how terms - of - trade movements play out in the economy is not new. for decades, the bank of canada has monitored the effect of swings in the terms of trade on real income and on the external value of the canadian dollar. over the years, we have built models to study how changes in the terms of trade and the subsequent economic adjustment affect the see, for example, d. leung. 2004. " the effect of adjustment costs and organizational change on productivity in canada : evidence from aggregate data. " bank of canada working paper no. 2004 - 1. economy. 9 but it is only recently that bank staff have formally incorporated a separate commodity sector into our main projection model, totem. in contrast to the bank's previous model, which treated economic activity as a single aggregate, 10 totem - which stands for terms of trade economic model - makes explicit the distinction between raw materials or commodities, and manufactured goods. this distinction is crucial for two reasons. first, commodity production represents a sizable proportion, some 11 per cent, of canadian gdp, 11 and commodity exports account for nearly 45 per cent of the dollar value of our total exports. second, the commodity sector and the manufacturing sector are characterized by different technologies and different competitive structures, which have important implications for the behaviour of inflation. for instance, the production of commodities is more capital - intensive and more price - inelastic than the production of other goods and services. moreover, commodity prices are set in world markets, whereas manufactured goods are subject to product differentiation and to a greater degree of pricesetting influence by firms. in totem, the key driver of consumer prices is the marginal cost of producing consumer goods. consumer goods are produced using four inputs : labour, capital, an imported intermediate good, and commodities. in this framework, the marginal cost can be expressed as a function of labour costs ( including the costs of hiring and training ), as well as the price of imported intermediate goods, the price of commodity inputs, the price of investment goods, and the rate of capacity utilization. totem is a clear improvement over the previous model in its ability to capture the response of the canadian

, the disparity between the effected countries has been large too. the plummeted commodity prices as well as other factors led to this outcome as commodity exporters suffered from both the lower commodity revenues and the tightening global financial conditions. financial markets also differentiated em countries by policy frameworks and prudent policies. those having rich and better policy frameworks and prudent policies have withstood the recent global financial turmoil better than the others. with lessons learned from previous episodes and improvements over the years, emerging market economies on average are better positioned to withstand financial turbulences, both now and in the future, than in the past. they embarked on extensive structural reforms aimed at overhauling financial regulatory and supervisory systems, strengthening public finances and fiscal discipline, granting central banks independence and adopting flexible exchange rate systems. these reforms enabled them to implement more prudent and countercyclical policies. em economies supported their post crisis reforms by accumulating adequate foreign exchange reserves as an alternative to the imf provided financing, which carries strong conditionality, as well as by further deepening and broadening their domestic financial markets. as a result, stock and flow balances, policy frameworks, and levels of economic confidence and market development in em economies have strengthened substantially and radically. deepened and bis central bankers ’ speeches broadened domestic financial markets have alleviated the so called original sin problem. it is fair to say that they now look strong enough to render the adverse effects of external financial shocks manageable. given the current ims what em economies can most rely on are their prudent policies, better policy frameworks, foreign exchange reserves and flexible exchange rates. as for the ims related questions of the session namely • “ do floating exchange rates along with largely unrestricted capital flows play their role of shock absorber? are we going to witness a return of currency crises of the 1990 ’ s? • what does china economic slowdown and its current adjustment means for capital markets and for the quest of renminbi internationalization? • should and can the systematically important countries “ internalize ” their spillovers effects to mitigate negative external impacts? ” i organize my points around the three functions of an ims – liquidity, confidence and adjustment. on liquidity function, there are two areas that we require significant improvement on the current ims. the first is related to excessive liquidity during normal times. what are the appropriate policies to curb excessive capital flows? the imf ’ s