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IDC4U1
- Economics Unit -
OUTLINE 2012/2013
1
Mr. Safarian
1. GDP Gross Domestic Product = C+G+I+X-M
2. Interest Rates and their effect on economic sectors and on currency
3. Inflation and CPI ( Consumer Price Index) + building a CPI Index
4. Unemployment
5. Government Debt vs. Deficit vs Surplus
6. Bank of Canada is the Central Bank of Canada
the economy
Role + Tools to affect
7. Statcan.ca is the website for Statistics Canada Explore and use
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
2
Mr. Safarian
Macroeconomics
Microeconomics
Analysis of a country's economy as a whole.
Analysis of the behavior of individual economic units such as
companies, or households.
GDP
Gross Domestic Product
C
Consumer Spending
G
Government Spending
I
Investment Spending ( on real capital and equipment, not on stocks
and bonds. Buying stocks and bonds is merely changing ownership
of financial instruments)
X
Exports
M
Imports
T
Taxes collected by governments; includes Income tax, Corporate
Income Tax, Gst, Pst, Excise Tax , Tariffs
S
Savings which is any funds not spent or taxed away
Per capita
per person measurement
Unemployment Rate Rate calculated by dividing :Unemployed by the Labour Force
Unemployed
Those over age 15 who wish to work fulltime but are unable to find work
Full Employment
The rate of employment which corresponds to about 5.5%
unemployed (in Canada). The 5.5% unemployed is thought to be
“frictional” unemployment
Inflation Rate
The rate at which the general level of prices for g & s is rising.
Indexed Pension
A Pension which is adjusted upwards each year to allow for inflation
CPI
Consumer Price Index which measures inflation using a basket of
consumer goods and services over the years in question
GDP Deflator
A method to measure the inflation of all G&S in the economy, not
just consumer G & S
Real GDP
GDP adjusted for inflation (start with Nominal GDP, then adjust.
Same as Constant Dollar GDP)
Nominal GDP
GDP as measured using the prices of the time ( nominal = by the
numbers)
Constant Dollar GDP GDP adjusted for inflation (same as Real GDP)
Business Cycle
Repetitive cycles of economic expansion and contractions. Peak,
Recession, Trough, Recovery/Expansion. Has no set time period
but is many years in length.
Recession
A temporary downturn in economic activity, usually indicated by two
consecutive quarters of a falling GDP. ie at least 6 months
Depression
Period when economy turns down for at least one year, resulting in
falling prices, unemployment problems, and low investment
Deficit
A government budget with Spending ( G ) greater than Tax
Revenues ( T). Tends to stimulate the economy
Surplus
A government budget with Tax Revenues ( T ) greater than
Spending ( G ) Tends to contract the econmomy
Debt
Money owed. The federal government of Canada owes about $550B
Fiscal Policy
Changes in G and T to accomplish the goals of the Government
Monetary Policy
Changes in Interest Rates to accomplish the goals of the Bank of Canada
Productivity
A mewasure of the efficiency of action. Measured as a ratio of:
OUTPUT / INPUT. The higher the ratio, the more efficient or productive
Central Bank
A country's main bank whose responsibilities include administration of
monetary policy, issuing currency and maintaining a healthy business
banking system. Canada’s is called the Bank of Canada
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
3
Mr. Safarian
As noted in our discussions of the economic ideas in the Unit 2 outline, the
economy of Canada is complex and inter-connected within Canada and also with
other economies around the world. Our biggest trading partner by far, is the USA,
with whom we do about 75% of our trades and with whom we have a $ 30 Billion
trade surplus. We tend to have trade deficits with all other countries, even our
other key trading partners in Europe, Mexico, Japan and China.
The circular flow diagram gives us an easy way to measure and consider the
important sectors of the Canadian economy. GDP = C+G+I+X-M (see definitions in
glossary), plus the government receives T (tax revenues), while the
banking/finance sector accepts S (savings) and funnels them to I (investment
spending).
There are three main goals of policy: lots of jobs ( try to be near 6%
unemployment), good GDP growth ( 3% - 4.5% would create jobs with probably
only low inflation) and low, stable inflation ( the Bank of Canada has a goal of 1% 3% inflation only). Unfortunately, these goals are often in conflict with each other.
To get jobs and low good GDP growth we need lots of demand ( C + G + I + X) but
to keep inflation under control we sometimes need to reduce this same demand.
This is the key conflict: (more jobs and GDP Growth) vs. ( keep inflation about 2%)
The Central Bank ( Bank of Canada) has its major goal to control inflation.
The federal and provincial governments always try to get re-elected and this
usually means try to have lots of jobs and GDP growth.
Public Body
Major Goal
Accomplished By:
Bank of Canada
Keep Inflation
between 1% to 3%
Federal Gov’t
Keep unemployment
low ( near 6%)
Keep GDP growth at
a reasonable level
( 3 – 4.5% approx. )
Monetary Policy ( raising interest
rates to lower inflation; selling
gov’t bonds accomplishes this)
Fiscal Policy ( Taxing and
Spending decisions)
Fiscal Policy ( Reduce Tax and
Increase Spending)
Notice the conflict between low inflation and high growth.
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
4
Mr. Safarian
*If Unemployment increases:
a) it becomes more likely that the Government may try to use Fiscal Policy to reduce
unemployment. This can be achieved by reducing taxes or increasing spending. This is
called Stimulative, to increase GDP and jobs. Consider that spending, especially
targeted spending programs, are thought to be more specific to a particular targeted
geographic area or to a specific group of Canadians. Even tax rules
can be made specific for certain Canadians to try and help them .
b) there is a slight chance that the Bank of Canada may use MONETARY POLICY to
reduce interest rates if unemployment increases. THE BANK OF CANADA WOULD
ONLY DO THIS if the Bank’s number one goal is clearly being achieved ( ie that inflation
is very low , perhaps 1-2% for a six months or more) The Bank focuses almost
exclusively on controlling inflation. The Bank of Canada is well aware of the impact of
unemployment, but is far less likely to use policy changes of any sort unless inflation is
extremely low.
If Inflation increases:
a) The Bank of Canada ( B of C) will likely raise interest rates to fight inflation. The B of
C has an inflation goal of 1-3% inflation per year at most. The B of C influences the
inflation rate by setting interest rates, especially the Overnight Lending Rate (the rate at
which typical chartered banks can borrow from the B of C if necessary). If inflation is less
than , say, 1.5% the B of C will have no concern at all about any slight increase in
inflation, and would not change interest rates if inflation bumped up to say 2%. From
there the B of C would begin to be more concerned since the upper level it wants to
allow is only 3 %. If inflation were very low (less than 1%) or if there were deflation
(prices were dropping!) then the B of C might lower interest rates to Stimulate the
economy.
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
5
Mr. Safarian
Key Goals
Target Levels
Who Monitors
GDP Growth
3.0- 4.5%
B of C;
Monetary
each government
Fiscal
Rate ( % )
Type of Policy to Adjust
Unemployment
down to
B of C;
Monetary
Rate ( % )
about 6.0*
each government
Fiscal
Inflation Rate
1–3%
B of C only
Monetary Only
*Unemployment of about 6.0% is thought to be the same as “ Full Employment”
in Canada. This percentage is not agreed upon by all, nor is it the same in all
economies. It is thought to be closer to 4% in the USA, closer to 7% in Sweden.
The Inflation Rate is the key economic indicator for Canada, supreme above all others.
This is so because the Bank of Canada has stated that low, stable and predictable
inflation is the key way the Bank can contribute towards solid economic performance
and rising living standards for Canadians. If it is felt by the Bank that inflation may get
away from the 1 – 3% target range in the future, the Bank must take measures to avoid
that. All other economic goals are secondary. They do this through Monetary Policy
only.
The unemployment rate is also important to the Bank, but perhaps more important to the
Federal and Provincial governments. If inflation is well within the target range, and there
is a low chance of moving above the range, the Bank might lower interest rates to
stimulate GDP growth and jobs. The governments would almost always prefer to
stimulate more jobs, but may only do so by fiscal policy. Sometimes the governments do
this by very localized tax or spending policies. These may then affect only certain
income groups or geographic groups.
GDP growth is preferred in the target range 3.0 – 4.5 % , but as growth gets above 4%
the Bank of Canada will be concerned about future inflation and may in fact begin to
raise interest rates if this high growth rate continues for many months.
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
6
Mr. Safarian
If Interest Rates increase in Canada, foreigners with other currencies may wish to
invest in Canadian financial securities to earn more interest. This means they will sell
their currency to buy our Canadian Dollar. Thus, there is more demand for our dollar and
it will increase in “price” ie our exchange rate will rise.
If our interest rates drop, the opposite happens . Foreigners won’t want our lower
interest financial securities and so will sell our dollars that they have or, stop buying so
much each month. This drops the price ( exchange rate) of our dollar. Also note that
when this interest drop is announced, all speculators feel the dollar will drop. If they have
any Canadian dollars, they may try to sell them before the price drops. This encourages
the price to drop! Changes in interest rates almost always cause currency exchange
rates to move in the same direction as the interest rate change.
**
Nominal Interest Rates ≈ InflationRate + 3% in many economies
ADJUSTING FOR INFLATION: SURE A MOVIE TICKET USED TO BE 50 cents.....
Nominal
Real 200xanything
=
200x
anything
---------------------------------------
Index200xanything
A sample CPI for Haigland, Base 2008
CPI
2007
2008
2009
2010
98.3
100
102.2
104.6
The above yields inflation of :
Inflation
**
NA
1.73%
2.2%
2.35%
Review the Worksheets re Inflation and CPI and GDP Deflator
x
100
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
7
Mr. Safarian
Types of Unemployment:
Frictional, Seasonal, Cyclical, Technological, Structural,
Replacement
Current Unemployment Rate: 5.8% ( Highest in
Newfoundland, lowest in Alberta)
Unemployment
2010 figures
Population of Canada
33 200 000
Canadians over 15 years
26 110 000
Employed Canadians ( 15+ years of age)
16 590 000
Unemployed
1 130 000
Labour Force = Employed + Unemployed
Labour Force Participation Rate ≈ 68%
derived from:
( Employed + unemployed ) / Population over 15 = 17.6 / 25.8 ≈ 68%
Types of Unemployment:
Frictional, Seasonal, Cyclical, Technological, Structural, Replacement
Frictional: Unemployment caused by workers who are between jobs and seeking a new
one, often by moving locations or from graduating from university and seeking a new
position
Seasonal: Unemployment caused by recurring climate factors, such as the impact of
winter on farming, tourism or construction and the impact of spring and summer on ski
tourism etc.
Cyclical: Unemployment caused by a downturn in the business cycle. Often it means a
small percent of all workers in almost all industries lose their jobs as overall GDP drops.
Technological: Unemployment caused by a change in the production process away
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
8
Mr. Safarian
from labourers and using machines and technology instead. Ex: welders in a car factory
are replaced by robotic mechanisms.
Structural: Unemployment caused by long-term changes in the economy especially
reduced demand for the goods that used to be produced. Ex : Workers making
typewriters lose their jobs since computer word processing reduces demand for
typewriters. Note this is NOT technological unemployment. They were NOT replaced by
machines making typewriters, they lost their jobs since the general economy, the
STRUCTURE of the economy , did not require their goods (typewriters) anymore.
Replacement: Unemployment caused by the movement of firms using a high amount of
labour out of Canada and into low-cost labour countries. The workers are “replaced” by
foreign workers and foreign production.
Using unemployment concepts for analysis:
CASE #1
Haigland has the following statistics:
Population: 3.5 million
Haigers over 15 years of age: 3.0 million
Labour force participation Rate: 73%
Unemployed: 150 000
REQUIRED: State the size of the Labour Force, the number of people working, and the
unemployment rate for Haigland
CASE #2
Yorkmillia has the following statistics:
Yorkmillers over 15 years of age: 2.2 million ( this is 82% of total population)
Labour force participation Rate: 71%
Employed: 1.3 million
REQUIRED: State the size of the Labour Force, the number of unemployed, the
unemployment rate for Yorkmillia, the total population
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
9
Mr. Safarian
Case #3:
State the type of unemployment in each case:
a) Jay Dubs lost her job when Canada went into recession
b) Won’tson lost his job paving highways in November in Saskatoon (in northern
Saskatchewan)
c) Tom lost his job making music cassettes since sales dropped by 80%
d) Frienda lost her job when she quit to move to Newfoundland to be with a “close
friend”. She is looking for work.
e) Bix lost her job weighing and measuring filled cement bags at the cement factory ( in
the “Quality Assurance” department) when lasers and computers were purchased to do
the same job.
*****************************************
Government Deficit is the Spending of the Government greater than the Tax Revenues
of the same Government
Government Debt is the total unrepaid deficits the government has incurred over time.
Canada had no debt by about 1965 but had deficits every year from then until 1996.
Canada had a surplus every year since and had paid off over $100Billion dollars in debt
to reduce Federal debt below $500 Billion by 2008. Today, Canada’s debt is close to
$600Billion as $over a hundred billion was added following the global financial crises of
2008 onwards.
Canada’s Debt to GDP ratio was almost 75% in 1996. Today it is still only about 35%.
Japan’s debt to GDP is near 200% . Greece is near 160%, Italy and Ireland near 125%
and even the USA is now above 100%.
IDC4U1
- Economics Unit -
OUTLINE 2012/2013
10
Mr. Safarian
THE ROLE OF THE BANK OF CANADA
“The Bank of Canada is responsible for:
1. Monetary Policy
The goal of monetary policy is to contribute to solid economic performance and
rising living standards for Canadians by keeping inflation low, stable, and
predictable.” (emphasis added by your teachers)
See also: http://www.bankofcanada.ca/en/faq/faq_bank_roles.html
The Bank of Canada also
2. Issues Bank Notes ( currency)
3. Actively promotes a safe, sound financial system
4. Manages the funds of the government including Canada Savings Bonds
The Bank of Canada summarizes Monetary Policy:
“When the Bank changes the Target for the Overnight Rate, this sends a clear signal about the
direction in which it wants short-term interest rates to go. These changes usually lead to moves in
the prime rate at commercial banks, which serves as a benchmark for many of their loans. These
changes can also indirectly affect mortgage rates, and the interest paid to consumers on bank
accounts, GICs, and other savings.
“When interest rates go down, people and businesses are encouraged to borrow and spend
more, boosting the economy.
“But if the economy grows too fast, it can lead to inflation. The Bank may then raise interest
rates to slow down borrowing and spending, putting a brake on inflation.
“In choosing a Target for the Overnight Rate, the Bank of Canada picks a level that it feels
will keep future inflation low, stable and predictable. Keeping inflation low and stable helps
provide a good climate for sustainable economic growth, investment and job creation.
“When comparing Canada's official interest rates with those of other countries, the Target for the
Overnight Rate is the best rate to use. It is directly comparable with the U.S. Federal Reserve's
target for the federal funds rate, the Bank of England's two-week "repo rate," and the minimum
bid rate for refinancing operations (the repo rate) at the European Central Bank” July 2001
See http://www.bankofcanada.ca/en/backgrounders/bg-p9.html
PROBLEMS WITH MONETARY POLICY:
1. It takes time (up to 24 months) before all the effects of a change in interest rates are felt in an
economy.
2.The future of inflation is difficult to judge, so the correct changes are difficult to determine.
3. Other sectors, including perhaps the government, might implement conflicting policies