this will help canadian firms and individuals read market signals more clearly and allow them to make plans with confidence in the future value of their money. near - term implications of global developments that's a look at the medium term, and it is important for business people and economic policy - makers to always keep an eye on the horizon. but, as you run your business from day to day, and as we at the bank conduct monetary policy, it is the shorter - term developments that are the greater focus of attention. so, let me spend a few minutes on the near - term outlook for the world economy, and what that outlook implies for foreign demand for canadian goods and services. as i said before, the emergence of china and india is having an important impact on the canadian economy through an increase in demand for many of the commodities that we produce. this has caused a run - up in the prices of nickel, potash, and steel, among others. and, in turn, this has boosted the income of many canadian producers, even after taking into account the effects of the large appreciation of the canadian dollar that we saw in 2003. of course, the most high - profile price increase recently has been that of oil. very rapid growth in asia has led to unexpected additional demand for oil. for the time being, this unanticipated demand is putting pressure on a market that already had little spare capacity. over the medium term, oil production will, in all likelihood, increase to meet this additional demand. but it takes time for new production to come on line. thus, it is not unreasonable to think that oil prices will be higher in the near term than what we might expect them to be over the medium term. our best judgment at the moment is that high levels of growth in asia will continue over the next couple of years, and that demand for commodities will continue to grow, although perhaps not quite as rapidly as in the past couple of years. this is based on the not - unreasonable assumption that the chinese authorities will be able to manage economic growth at a more sustainable pace. while developments in asia are likely to play a very important role in supporting continued strength in the global economy, developments in the united states will still have the largest impact on the volume of canada's exports over the short term. as we said in our july monetary policy report update, recent data point to some slowing of u. s. growth from the red - hot pace of the second half of 2003

cannot directly measure potential output. further, the economic data that measure actual output are often revised - sometimes significantly so. the challenge for us, then, lies in estimating the size of the output gap, and there is always a significant degree of uncertainty around that estimate. so we look at a number of other economic variables to help us form an opinion about how large the output gap is. you can find out more about these variables on our web site. they include, among others, indicators of capacity in goods markets, signs of tightness in labour markets, and signals of pressures in the real estate market. some of these are quantitative, and some are qualitative, based on surveys of businesses conducted by our regional offices. another indicator is the rate of inflation itself. if core inflation - which strips out eight highly volatile components of the consumer price index - is consistently coming in above or below our expectations, it may lead us to adjust our view about the current size of the output gap. earlier, i said that when the economy is operating near its capacity, total demand for canadian goods and services - or what economists like to refer to as " aggregate demand " - is roughly in balance with total supply. total demand has two components - domestic demand and foreign demand. assessing foreign demand is difficult, but because it represents such a large share of total output in canada, we at the bank spend a great deal of time and effort trying to gauge that demand. of course, it is nothing new to say that our economy is importantly affected by events abroad. canada has always relied on international trade. for a long time now, the united states has been the focus of attention in assessing the world economy. but many of today's global economic developments have their origins outside north america, most notably in asia. before i talk about their current implications, i would like to take a few minutes to discuss the nature of these developments and their likely implications over the next decade or so. the medium - term implications of global developments just as japan and korea emerged as major players on the global stage in previous decades, china is now quickly becoming an economic powerhouse. and india is not far behind. when you consider that these two countries account for 40 per cent of the world's population, it is not hard to see why they are having such an impact on the global economy. as we look ahead, it is clear that china and india will be major global competitors, not just in labour - intensive industries, but