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Introduction SPHA511, John Ries Introduction Goal of course: Analyze the role of government in private enterprise economies such as Canada. • Under what circumstances should a government regulate or modify private enterprise and private markets in order to improve economic efficiency or social equity? • What considerations actually influence governments to intervene in private markets, and how have they done so in the past? • What are the effects of government intervention? Introduction Normative versus positive analysis Normative analysis asks the question: “What role should the government play in the economy?” Introduction What are the goals of government? • • • • economic efficiency and growth macroeconomic stability fairness other social objectives: the promotion of ethics, multiculturalism, Canadian culture, etc Introduction Positive analysis asks the question: “What explains the actual policies adopted by government?" Government may act in ways that do not promote public interests due to special interest groups or self-serving bureaucrats How well do you know Canada? 1.What was the Canadian population in 2007? What percent of the population in 2006 was born outside Canada? 2. What percent of the female population 25-54 was in the labour force in 2006? 3. What percent of the 25-64 population held a bachelor's degree or higher in 2006? 4. What percent of the Canadian population was 65 years of age or older in age in 2007? Between 50 and 64? 5. What were the unemployment rate, inflation rate in 2007? 6. What is Canada’s world rank in terms of per capita income? Who is highest? 7. Which provinces had the highest and lowest unemployment rates in 2007? 8. What was total government spending relative to GDP in 2007? 9. What is the total (federal and provincial) government deficit in 2007-8? What government’s primary source of revenue? Primary expenditure items? 10. What is the largest industrial sector in Canada in 2007 in terms of employment: 1) manufacturing 2) trade 3) agriculture and fishing, 3) forestry, fishing, mining, oil & gas , 4) health care and social assistance or 5) finance and insurance? In terms of GDP? 11. What percent of manufacturing sales in Canada are accounted for by foreign controlled firms? 12. What are Canada’s leading imports, exports? 13. What percent of Canadian GDP was exported in 2007? What was the U.S. share of Canadian exports in that year? Immigrant Population Canada (2006) Total - Place of birth United States Central and South America Caribbean and Bermuda Europe United Kingdom Other Northern and Western Europe Eastern Europe Southern Europe Africa Asia and the Middle East West Central Asia and the Middle East Eastern Asia Southeast Asia Southern Asia and other countries Number 6,186,950 250,535 381,165 317,765 2,278,345 579,625 489,540 511,095 698,080 374,565 2,525,160 370,515 874,370 560,995 719,275 59,410 Macroeconomic Indicators, Canada 1980-2006 25 Unemployment rate 20 Inflation rate Interest rate 15 10 5 06 20 04 20 02 20 00 20 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 19 80 0 PPP Total Tax as % GDP Sweden 54.2% of GDP Belgium 45.6% of GDP France 45.3% of GDP Italy 42.0% of GDP Netherlands 41.4% of GDP Norway 40.3% of GDP Germany 37.9% of GDP United Kingdom 37.4% of GDP Canada 35.8% of GDP Switzerland 35.7% of GDP New Zealand 35.1% of GDP Australia 31.5% of GDP Ireland 31.1% of GDP United States 29.6% of GDP Japan 27.1% of GDP Consolidated federal, provincial, territorial and local government revenue 2004 2005 2006 2007 2008 $ millions Revenue Personal income taxes Corporation income taxes Property and related taxes Consumption taxes Health insurance premiums Sales of goods and services Investment income Other revenue from own sources 468,557 499,676 531,137 561,187 590,718 145,324 155,136 167,409 180,034 193,491 38,925 46,928 50,893 58,240 65,995 44,244 46,721 49,404 51,220 52,993 98,918 104,495 107,844 105,396 111,461 3,132 3,206 3,258 3,268 3,424 39,130 41,275 42,869 45,938 48,278 35,984 38,600 45,341 47,748 47,791 9,946 7,950 5,950 6,823 3,916 Consolidated federal, provincial, territorial and local government expenditures 2004 2005 2006 2007 2008 $ millions Expenditures General government services Protection of persons and property Transportation and communications Health Social services Education Resource conservation and industrial development Environment Recreation and culture Debt charges Surplus or deficit 474,712 487,365 513,957 543,541 574,070 18,633 18,792 19,796 20,612 21,110 39,154 41,096 43,534 46,752 49,125 20,258 21,172 24,723 25,913 29,516 89,479 94,497 99,126 106,919 115,358 121,058 125,372 131,543 139,183 147,659 74,246 77,140 82,685 86,837 91,144 19,430 18,652 19,754 20,978 21,379 11,391 11,903 12,935 14,464 16,082 13,143 13,476 14,207 14,891 15,880 49,514 47,686 46,940 47,832 47,281 -6,156 12,312 17,180 17,647 16,648 Employment by industry 2003 2004 2005 2006 2007 thousands All industries 15,672.3 15,947.0 16,169.7 16,484.3 16,866.4 332.4 326 343.7 346.4 337.2 281.6 286.6 306.4 330.1 339.3 906 951.7 1,019.50 1,069.7 1,133.5 2,275.2 2,292.1 2,207.4 2,117.7 2,044.9 2,467.8 2,507.1 2,574.6 2,633.5 2,682.4 917.0 960.6 987.8 1,040.5 1,060.4 1,003.6 1,018.3 1,050.0 1,089.9 1,136.9 1,027.1 1,035.7 1,106.1 1,158.4 1,183.2 1,679.2 1,733.4 1,734.6 1,785.5 1,846.1 1,005.5 1,012.4 1,004.5 1,015.0 1,069.4 819.0 825.5 833.1 837.4 864.6 Agriculture Forestry, fishing, mining, oil and gas Construction Manufacturing Trade Finance, insurance, real estate and leasing Professional, scientific and technical services Educational services Health care and social assistance Accommodation and food services Public administration Canadian Trade ($cdn billion) 2003 2004 2005 2006 2007 399.1 429.0 450.1 453.7 463.1 Agricultural and fishing products 29.2 30.7 30.1 31.2 34.4 Energy products 60.5 68.1 87.0 86.8 91.6 Forestry products 34.5 39.4 36.4 33.3 29.3 Industrial goods and materials 66.8 78.0 84.0 93.9 104.4 Machinery and equipment 88.7 91.1 93.0 93.3 93.4 Automotive products 87.4 90.4 88.0 82.3 77.3 2003 2004 2005 2006 2007 342.7 363.2 387.8 404.3 415.0 Agricultural and fishing products 21.5 21.4 22.0 23.5 25.5 Energy products 19.8 24.8 33.7 34.6 36.6 Forestry products 3.0 3.2 3.1 3.1 3.0 Industrial goods and materials 65.3 73.5 78.6 84.0 85.1 Machinery and equipment 98.7 104.1 110.9 114.7 116.6 Automotive products 76.5 77.4 78.4 79.8 80.0 Exports Imports Canada Exports (billion $US) U.S. 2003 2004 2005 2006 2007 UK China Japan Mexico Netherlands 326.7 6.1 4.8 8.2 2.2 1.6 348.1 7.7 6.8 8.6 3.1 1.9 365.8 8.3 7.1 9.2 3.4 2.2 359.3 10.1 7.7 9.4 4.4 3.1 356.0 12.8 9.3 9.2 5.0 4.0 Total 381.1 412.3 436.3 440.3 450.4 Canada Imports (billion $US) 2003 2004 2005 2006 2007 U.S. 203.8 209.0 215.2 217.6 220.5 China 18.6 24.1 29.5 34.5 38.3 Mexico 12.2 13.4 14.6 16.0 17.2 Japan 13.8 13.5 14.8 15.3 15.5 Germany 8.6 9.4 10.3 11.1 11.5 UK 9.2 9.7 10.4 10.9 11.5 336.1 355.9 380.9 396.6 406.7 Total Merchandise Trade, 2005, $US billions Exports 1054.3 970.7 Imports 960.8 774.1 Balance 93.6 196.6 USA Japan France 904.3 595.8 459.2 1732.7 516.1 495.8 -828.4 79.7 -36.5 Netherlands Great Britain Italy Canada 401.3 377.9 366.8 359.6 357.9 501.2 379.7 320.1 43.5 -123.4 -12.9 39.5 Belgium 329.7 320.4 9.3 China (incl. HK) Germany Useful Economic Concepts 1. Opportunity Cost Definition: "the opportunity cost of any action is the value of the next most valuable action forgone" 2. Incentive Effects Individuals respond to economic incentives. Policies may have unintended consequences because they alter the incentives of individuals Useful Economic Concepts Activity • What is the opportunity cost of attending this MHA program? Use the formula for the present value of an annuity— PV=A[1-1/(1+i)n]/i, where A is an annual payment, i=0.05 is the interest rate, and n=30 is the number of years working, to solve for the additional income (A) necessary to justify your decision given your opportunity cost (PV). Incentive effects • Identify adverse incentive effects associated with – high marginal income tax rates – generous unemployment insurance – free healthcare • What healthcare policies (pay schemes, etc.) result in adverse incentive effects? • What is a negative income tax? Useful Economic Concepts 3. Marginalism • The paradox of value (water is cheaper than diamonds): Clearly, water is more important to people than are diamonds, yet diamonds are much more expensive. Why? • Prices reflect marginal value. Prices are determined on the margin P SD PD SW PW DD DW Q Useful Economic Concepts • It is important not to confuse the total value of an activity with the marginal value of increasing the activity. Just because health care is more important than parks does not mean funding should be increased on healthcare at the expense of parks. • Marginalist principle: any policy or action should be undertaken only if the incremental or "marginal" benefit exceeds the marginal opportunity cost. Useful Economic Concepts 4. Efficiency Efficiency relates to two questions: Is a given level of output being produced at lowest cost? Is the right level of output being produced? • (1) production efficiency is attained when a firm is managed so that total costs are minimized for a given level of output. This is exactly equivalent to saying that the maximum amount of output is being produced from a given level of inputs. • (2) allocational efficiency is attained when it is impossible to re-allocate the resources among a group of people in such a way as to make at least one person better off without making anybody else worse off. Allocational efficiency is also known as "Pareto-efficiency”. Useful Economic Concepts A Pareto improvement occurs when at least one person is made better off while no one is made worse off. Similarly, a potential Pareto-improvement is said to exist if a reallocation of resources allows those individuals who are net gainers to (hypothetically) fully compensate the net losers, and still be better off. Genuine Pareto-improvements are rare in practice, often the best we can hope for often is that a particular policy is a potential Pareto-improvement, which leaves open the question of whether gainers actually compensate losers. Health care funding and efficiency There are three ways to potentially increase efficiency in health care (1) Improve production efficiency—combine resources better in order to deliver more output $ S=MC S’=MC’ b a D=MB Q Health care funding and efficiency (2) Increase the healthcare budget if marginal benefits exceed marginal costs of additional supply. S S=MC D=MB Q0 Q* Quantity Health care funding and efficiency (3) Within the healthcare budget, reallocate funds away from areas with low marginal benefits and towards those with high marginal benefits $ MBp MBs A0 A* Total budget