about each one in a bit more detail. trade liberalization the first principle is trade liberalization, and our economic relationship with the united states has reflected that goal. as you and i discussed last year, the canadian and u. s. economies made difficult adjustments to freer trade in the early 1990s. the canada - u. s. free trade agreement and the north american free trade agreement exposed many canadian companies to stiffer competition. but freer trade also opened up new markets. and canadian companies have risen to the challenge. some of the sectors that we used to protect the most — such as furniture, clothing, and wine — have established a strong presence in international markets. on the whole, canadian industry has flourished with the competitive pressures generated by these agreements. and so has the trading relationship between canada and the united states. as you can see from chart 1, freer trade has clearly meant increased volumes of exports and imports. and now that we have made the adjustment, the more open trading environment is clearly helping to raise living standards for canadians. that should strengthen our resolve to see freer trade extended both within and beyond north america. we need to continue to work towards reduced trade barriers, both within nafta and at the doha round of multilateral talks. it won't be easy, but the long - term economic benefits will make our efforts worthwhile. structural reform the second principle focuses on improving the structure of national economies, to facilitate adjustment to changing economic conditions and to ensure the longer - term viability of social - and income - security arrangements. a number of initiatives have been undertaken in canada, but i'm going to focus on only three. i am sure that you're familiar with them, and many of you have participated in the debate surrounding these reforms. first, employment insurance ( ei ) benefits were restructured to strengthen the incentive to work. with these changes, and with improved economic performance, ei payments as a share of gdp have declined significantly over the past decade, from more than 2 1 / 2 per cent to just over 1 per cent, as shown in chart 2. second, the canada and quebec pension plans were revamped, to put them on a sustainable footing. the reforms meant some restructuring of benefits and a sharp increase in contributions — moves that were necessary, if unpopular. the results are shown in chart 3. the assets of the cpp are now managed by the independent canada pension plan investment board, the mandate of which

setting in motion an adverse feedback loop between the real economy and financial markets. collateral facilitates credit. if a weakening economy reduces the value of collateral, access to credit will be reduced. reduced access to credit constrains consumption and capital investment, further weakening the economy and – closing the loop – the value of collateral that can be pledged. and if along the way, some banks are forced to shut their doors, the information gap at the origin of this problem becomes even harder to bridge. 1 these are crucially important mechanisms. they have been understood for a long time and formed part of the economist toolkit. 2 this understanding proved to be a huge asset during the last crisis, motivating policy - makers throughout the world to act swiftly to break the adverse feedback loop once the crisis started. meeting in unsuspected places many of the connections between the economy and finance were perceived to be relevant mainly to countries in crisis, limiting interest to the study of historical episodes or economies with poorly developed financial markets. consequently, many of the models used by economists to analyze usually stable, advanced economies abstracted from features of the financial sector. this was seen as a reasonable approximation. but as we know, the recent crisis detonated in advanced economies after a long period of exceptional calm, often referred to as the “ great moderation. ” how does the economy shift from stability to crisis? while the links between the financial sector and the real economy are sometimes smooth and continuous, they can also be highly non - linear. these non - linear effects can manifest themselves by the slow buildup of imbalances in stable times – when many have been lulled into a false sense of security – followed by abrupt crashes. this underlines the need to improve our understanding of where the economy and finance meet during stable times and how crises erupt : many important breakthroughs in our understanding of the role of financial market imperfections on the real economy are rooted in the work of joseph stiglitz, michael spence and george akerlof, who were awarded the 2001 bank of sweden nobel prize in economics for their 1970s analysis of markets with asymmetric information. bernanke and gertler ( 1989 ) later formalized these financial market imperfections in a macroeconomic model to improve our understanding of the great depression. this is often referred to by economists as the financial accelerator model. see bernanke ( 2007a ) for a summary of the financial accelerator and the credit channel. models incorporating the financial accelerator in