growth of our economy's potential output, and changes in relative prices, such as the prices for energy or manufactured products. the growth rate of our economy's potential matters because it affects the balance of supply and demand in the economy. if the effects of these changes are not addressed by monetary policy, they will affect the degree of inflationary pressures in the economy. as for relative price changes, the bank tries to look through one - off changes, since these only temporarily affect inflation. however, the " temporary " price - level shifts driven by globalization can last a long time, and the pace of the shifts can be variable. it is the job of the bank of canada to conduct monetary policy in a manner that takes into account such persistent shocks and ensures that they do not affect inflation expectations. recent economic and financial developments so how have these different factors been affecting the conduct of monetary policy in canada? many of the factors just discussed featured prominently in the recent tokyo meeting of the g - 7 finance ministers and central bank governors. key topics included the slowdown in the u. s. economy and the related tightening of credit conditions in most advanced economies. in addition to outlining a series of measures to improve the functioning of financial markets, my colleagues and i agreed that each country should continue to take fiscal and monetary policy measures appropriate to their particular economic circumstances. canada's current economic circumstances were spelled out in the bank's monetary policy report ( mpr ) update last month. in that document, the bank said that the economy has been operating above its production capacity, thanks to strong domestic demand. this demand has been supported by a rise in real incomes, stemming from the gains in canada's terms of trade which, as i mentioned earlier, have been driven by globalization. the evolution of our terms of trade will depend importantly on demand from major emerging markets. the impact from our terms of trade is one factor that could lead to stronger domestic demand growth than we had assumed. this is something that we at the bank will continue to watch closely. another issue that will continue to be important for us is the evolution of the pass - through to prices of movements in the exchange rate. as i noted earlier, some retailers – notably of motor vehicles and books – have adjusted prices downwards in the face of greater competitive pressures stemming from the rise of the canadian dollar. in the mpr update, the bank said that we expect this to be a one - off movement in prices, but there is a

enough to internalize the costs – both political and fiscal – of promoting public goods such as the rule of law ; common standards for trade, products, and services ; and the liberalization of trade. many of their decisions, such as the repeal of the corn laws in england, were unpopular at the time, but ultimately proved beneficial. 2 we should all hope that similar courage will begin to guide participants in the current doha development round of trade negotiations. for a further discussion, see x. sala - i - martin, " the world distribution of income : falling poverty and … convergence, period, " the quarterly journal of economics. cxxi, no. 2 ( may 2006 ) : 351 – 397. see m. king, speech at a dinner for kent business contacts, ashford, kent, u. k., 16 january 2006, which cites the example of protests against the use of foreign hops in beer. so, is there anything different about this period of integration? i would argue that there are three aspects. first, the sheer scale of the process is unprecedented ; second, the relative size of the emerging economies being integrated into the core of the global economy means that their policies matter for advanced economies, as well as for their own ; and third, the widespread adoption of supply - chain management by business further enhances the depth of integration. in terms of scale, it is safe to say that never in history has economic integration involved so many people, both in raw numbers and as a percentage of the global population. for example, when north america and the periphery of europe were integrated during the latter half of the 19th century, their total population was half the size of the then - advanced countries. the comparable ratio for postwar japan was 10 per cent. contrast that with china and india today, which alone represent 2. 5 times the current population of advanced countries. 3 of course, the entire populations of china, india, and other emerging markets are not being instantly integrated into the global economy. if you adjust for the percentage of the population in the traded - goods sector, however, the effective global labour supply quadrupled between 1980 and 2005, with most of the increase taking place after 1990. 4 this trend is set to continue : the globally integrated labour force is projected to double again by 2050. 5 similarly, the scale of cross - border flows of goods, services, and capital is now unprecedented. the global economy has opened dramatically – merchandise exports now make up