Economic Principles (Ch. 1)

Economics

oikos to manage

nemo house

- social study

- teaches how to use efficiently scarce resources (human, capital, money,

resources)

Micro-economics using resources at a firm’s level

Macro-economis using resources at a national level (federal/provincial)

Types:

Analytical/Positive

- based on facts

ex. Inflation rate, growth rate, unemployment rate

- normative

based on opinion

Fallacy

- a statement that appears to be true but is not

a) Fallacy of Composition

- what is good for an individual is good for society and vice versa

b) Post-hoc Fallacy

- if event B occurs after event A, B is always caused by A

c) Fallacy of Single Causation

- there is only one cause for a series of negative events

Three Basic Economic Laws

Opportunity Cost

everything that is lost for choosing another option

Assumptions:

A) only two goods are produced

- consumer goods for direct personal use

ex. to read, clothes, phone, shoes

- capital goods business-to-business

used by businesses to produce other goods

ex. tractors, industrial equipment

B) all resources are used at full capacity

- no unemployment

- no idle equipment

- no unused land

1. The Law of Increasing Relative Cost

Ex.

Production

Alternatives

Tractors Bread Opportunity Cost

for Tractors

A 1 15 000

B 2 14 000 1000 breads

C 3 12 000 2000 breads

D 4 9 000 3000 breads

E 5 5 000 4000 breads

0 5000 breads

- to increase the production of one good, increasing quanities of the other

good have to be sacrificed

2. The Law of Diminishing Returns

Ex.

- two inputs

land is fixed

workers increase

- output corn

* If atleast one input is fixed, the output will increase but only to a point; the

yield will be lower and lower. *

3. The Law of Increasing Returns to Scale

- if all inputs increase simultaneously, the output will continue to increase

Ex.

Year Land (ha) Workers Corn

Production

(kg)

Yield

1 10 1 1000

2 20 2 2000 1000

3 30 3 3200 1200

4 40 4 4600 1400

5 50 5 6200 1600

6 60 6 8000 1800

7 70 7 10000 2000

Year Land (ha) Workers Corn Production (kg)

Yield

1 10 1 10002 10 2 2000 10003 10 3 2800 8004 10 4 3400 6005 10 5 3800 4006 10 6 3900 100

Production Possibilities Curve (PPC)

- a graphing representation of maximum quantities that can be produced

with existing resources

- any point inside the PPC shows that the resources are not efficiently used

or there is environmental problems

- any point outside the PPC is just a future goal that cannot be achieved with

current/existing resources

PPC Shape

- concave the opportunity cost increases with every extra unit produced

(increasing quantities of the other products have to be sacrificed)

- straight if the opportunity cost is equal

Productive Resources & Economic Systems (Ch.2)

A. Economic Systems

a set of laws and institutions helping a country to use its resources

What to produce? How to produce it? For whom to produce?

Traditional

Economy

Command

Economy

Market Economy

What to

produce

?

what is needed

for own

consumption

determined by

central authority

What the

consumers have

demand for

How? Using primitive

methods passed

on from

generation to

generation

determined by

central authority

in the state’s

best interest

Using privately

owned factors of

production

For

whom?

for own

consumption, for

use by

immediate

family; surpluses

in trade

determined by

central authority

for consumers

having different

purchasing power

Strengt

hs

minimal change

decisions made

as a family unit

Little damage to

environment

Consumption and

waste minimized

Focus on self-

reliance and

simplicity

No social

conflicts,

reproduction

planning

promotes growth

(capital goods

production

favored over

consumer

goods)

Planning helps

reduce waste

Equitable

distribution of

income and

wealth

Planning

provides stability

(business cycles

maximum freedom

of individual

choice

variety of goods

and services

available to

consumers

Competition helps

keep quality high

and prices low

Profit motive

provides incentive

to be efficient

Flexibility to revise

decisions as

market conditions

eliminated)

Individuals serve

the state; the

state provides

their needs

No exposure to

business cycles

change

Incentive

Efficient use of

resources

Limitati

ons

little opportunity

for social

improvement

No monetary

system (goods

are exchanged)

Little long-term

planning (most

decisions day-to-

day)

Limited quality,

quantity, and

variety of goods

Individualism is

discouraged

No technological

progress, no

planning, no

incentive, no

innovation

bureaucratic and

inflexible

Limits individual

choice,

incentive, and

initiative

Forced to meet

production

quotas,

managers will

favor quantity

over quality

Limited

availability of

consumer goods

Little incentive

to innovate

manipulation of

consumer wants

by advertising

Business cycles of

growth and slow-

down

Income and wealth

unevenly

distributed

Large producers

can influence price

Over-consumption

can cause

resources to run

out

Exampl

e

Isolated tribes in:

Africa, Arctic, etc.

Cuba, North

Korea

Past: China,

USSR, Europe

- USA, Hong Kong,

Singapore

Mixed Market Economies

- combination between centrally planned economies and free market

economies

- ex. Canada, most countries in the EU

Characteristics:

- private property (free market)

-> encouraged and protected- public (government) property (centrally

planned)

-> ex. OLG, LCBO, CBC, Canada Post, Via Rail* trend: privatization

-> the sale of government corporations to private investors

- competition, incentive (free market)

- government intervention (centrally planned)

- regulations -> financial sector

-> open the market (prevent acquisitions, monopolies)

-> importing/manufacturing (drugs, weapons)

- social services (centrally planned) (healthcare, education

-> free/subsidized)

B. Political Systems

Types:

Dictatorships

- one political party

- no free elections

- no freedom of speech

- no religious freedom

- types -> communism: Cuba, North Korea, China, Vietnam, Laos

-> fascism (military regime): (past) Nazi Germany, Italy, Spain, Argentina,

Democracies

- many political parties

- free elections

- personal freedoms

- types -> constitutional monarchies: ex. Canada, New Zealand, Jordan,

Sweden

-> republics: USA, France, Germany

C. Economic Resources

Factors of Production = all assets used by businesses to create

goods/services

Tangible

Land- all natural resources on/below ground and water (fresh water, fish,

forests, metals, minerals)

Labour- physical labour

Capital- real capital: buildings, machineries, equipment

- money capital: cash

Intangible

Labour

- skills, knowledge, expertise

Entrepreneurship

- all the ideas of starting/running a business

Business Environment

- stability: political & economic

- country’s openness towards private business

D. Government Goods

Conflicting

- in order to reach one goal, another has to be sacrificed

- ex: to decrease inflation, interest rates are increased, resulting in slower

economic growth

Complementary

- two goals can be reached at the same time

- ex: high economic growth and low unemployment

1. Political Stability

2. Economic Freedom

3. Economic Growth

4. Price Stability

5. High Unemployment

6. Environmental Protection

7. Viable Balance of Payments, Stable Currency

8. Reduce Social Gap, Transfer of Payments

9. Reduce Public Debt

10. Increased Productivity and Efficiency

The Evolution of Economic Thought (Ch.3)

Adam Smith

- author of “The Wealth of Nations”

- “the father of Capitalism”

- Before:

- Mercantilism government control on imports and exports, maximize

exports

restrict imports

- During:

- Physiocrats promoters of “laissez-faire” capitalism

minimum government intervention

“the invisible hand” (the supply and demand) will solve the problems in

the economy

- Major Ideas

1. Division of labour (specialization of workers)

- results in higher productivity

2. Law of accumulation

- reinvest a part of the economic profit in new technology, will result in

higher profits

3. Law of Population

- in 1700’s: beginning of Industrial Revolution

high poverty high mortality rates shortage of qualified labour higher

wages better standard of living lower mortality rates surplus of

workers lower wages lower standard of living high mortality rates

shortage of qualified labour............

Thomas Robert Malthus

Ideas:

- Population increases in geometrical progression

- Food production increase in arithmetical progression

Prediction:

shortage of food

starvation poverty

Solutions

preventive checks abstinence

positive checkswars, diseases

David Ricardo

Ideas:

A) Social Classes:

1. Industrialists bring progress, but not enough representation in the

parliament

2. Working Class will live in poverty

3. Aristocracy (landlords) -> very good representation in parliament, but are

not progressive

B) Helped abolish the Corn Law (high taxes on imported corn wheat)

C) Absolute & Comparative Advantage

- promoter of free trade

Karl Marx

- “the father of communism”

- major publication: “The Capital” (Das Kapital)

Ideas:

- social classes:

- proletariat (working class)

- bourgeoise industrialists aristocracy

- Surplus of Values

- Capitalism will collapse:

bloody revolutions

start in Western Europe (because more industrialized)

ANASTASIA AND KARL MARX

- Bolshevik Revolution in 1917

- Anastasia escaped?

never found, no one knows what happened to her- Started in Eastern

Europe, not Western

John Maynard Keynes

- UK’s representative to Bretton Woods

- GATT was created (currently known as WTO)

- the “Gold Standard” was abolished- supporter of government intervention

in the economy

- During the Great Depression

government investment in infrastructure

- jobs created, economic growth

war bonds used to partially finance the war

- cashed after the war, increased demand for goods

- economic growth

John Galbraith

A) Ideas:

- consumer goods abundance and a surplus

- public goods shortage (health care, education)

- public goods government’s job is to solve the problem

B) All major decisions are made by the corporate executives, not by

shareholders.

Milton Friedman (MONETARIST- all problems in economy can be solved by money)

- Nobel Prize winner for economics

- leissez faire capitalism advocate

- no government intervention in economy

- advocate for abolishing minimum wage

- the potential problems in the economy could be solved by controlling:

1. Interest rates (IR)

2. Money supply: the increase in money supply should be equal to 3-5% per

year (long-term growth)

Micro-EconomicsDemand and Supply (Ch. 4)

Demand

- Consumer’s side of the market

- Def: the quantities of goods and services the consumers are willing to buy

at various prices

Ex. Demand for gold is up due to market volatility

- The Law of Demand: there is a reverse relationship between prices and

quantity demanded (QD)

- QD: as prices (p) go up, QD goes down, If everything else stays the same

(ceteris paribus)

- QD: The quantities demanded at specific prices

Ex. Pizza price increases from $2 to $4, QD decreases from 10 slices/week to

6/week

Supply

- The producer’s (seller’s) side of the market

- Def: the quantities the producers are willing to supply at various prices

- The Law of Supply: there is a positive relationship between price and

quantity supply (QS)

- if prices go up, QS goes up if other factors stay the same

- Supply the general supply for a product

the total Q of gold produced by Barrick Gold in a year

- QS specific prices & quantities

Factors Affecting Demand (D)

Income- if the income increases, demand for inferior goods (no name

products, low cost/quality) will decrease , demand for

normal goods (brand name, higher price/quality) will increase

Population

Ex: Panam games in Toronto, # of tourists increases, demand for hotels,

transportation, food

Tastes & Preferences

Ex: positive advertising for organic food -> demand for organic food

increases

Consumers’ Expectations

Ex: IR will increase in 2014 (fall), demand for houses increases in 2013-

summer 2014

Price of Substitute & Complementary Goods

Substitute:

Starbucks increases P for coffee, D for coffee at Tim Horton’s will increase

Complementary: P of hot dogs increases, D for ketchup will decrease

Factors Affecting Supply (S)

Technological Advances

- cost of production decreases- S increases

Any Change in Cost of Production

Ex: P of raw materials increases, S decreases

: Wages will increase, S decreases

Changes in Taxes

- Taxes increase, S decreases

Environmental Changes

Ex: frost in may crops are compromised

S decreases

Prices of Related Outputs

Ex: Global price of corn increases, supply of potatoes decreases b/c higher

price for corn

Surplus

P

D S

Q

Shortage

P

D S

Q

Applications of Demand and Supply (Ch. 5)

Factors Affecting Elasticity

1. Type of Products necessities inelastic

luxuries elastic

2. Percentage taken away from your budget

Ex: expensive goods elastic (expensive cars)

cheap goods inelastic (pencils, chalk)

3. Time

- short term inelastic

- long term elastic

4. Availability of Substitutes

- substitutes elastic

- no substitutes inelastic

Elasticity of Supply

- the suppliers’ response to changes in prices

- ES= Qs

P

- eg: qs1= 450, p1= $17, qs2= $475, p2= $22

: Es= 450 – 475

(450 + 475)

2 .

17 – 22

(17 + 22)

2

Elastic: Inelastic: Unitary:

P < Qs P > Qs P = Qs

Factors Affecting the Elasticity of Supply

1. Cost of production

- costs: low supply is more elastic

high (eg. new factory) S is more inelastic

2. Time

- short run S is more inelastic

- long run S is more elastic

3. Type of Product

- perishable inelastic

- non perishable elastic

Consumer’s Choices and the Utility Theory

- Utility Theory – helps the consumers to make the right choices when

dealing with a limited budget

- Consumer Satisfaction measured in utils (abstract concept)

- Total Utility (TU) – total satisfaction consumers can get from using a

product

TU increases as Qd increases

- Marginal Utility (MU) – extra satisfaction consumers get from using an

extra unit of a product

As MU decreases, Qd increases

Satisfaction is maximized at:

MU B = MU Y

PB PY

Possible Combinations

1. 2B + 3y = 2x2 + 3x1 = 4+3 = $7<budget

2. 3B + 4y = 3x2 + 4x1 = 6+4 = $10 budget

3. 5B + 5y = 5x2 + 5x1 = 10+5 = $15>budget

Adam Smith’s Paradox

- “Diamond water paradox”

- Diamonds elastic demand

people are willing to pay high prices

scarce

TU is high

MU is low

Water perfect inelastic demand

cons. Not willing to pay high price

abundant

TU is very high

MU is low

Government Intervention

a. Price Floor

- a minimum price the producers are allowed to charge for their product

- goal is to protect the producers

- ex: agricultural products

b. Price Ceiling

- maximum prices the producers are allowed to charge

- goal is to protect consumers

- ex: medical services not covered by OHIP, legal services

c. Subsidies

- grant given by the government to specific categories of producers

- goal is to protect the producers (infant industries/farmers, etc.)

- negative impacts:

- taxpayers’ money used

- infant industries may become too reliant

d. Quotas

- restrictions imposed on quantites produced or supplied

- target is inelastic products (agricultural)

- goal is to increase the producer’s revenues

Business Organizations and Finance (Ch. 6)

Canada’s industrial sectors:

1. Primary Sector (comparative advantage in this sector):

- exploitation of natural resources

- agriculture, mining, forestry, hunting, fishing, etc.

2. Secondary Sector:

- semi manufactured and manufactured products

- healthcare, retail, etc.

3. Tertiary Sector:

- IT

- finance

- bio-tech

- research sector

Types of Business Organizations

1. Sole Proprietorship

- one owner

- usually small businesses

- Advantages: easy and low cost start-up procedure

- Disadvantages: unlimited liability

: if business goes bankrupt, owner cannot apply for dude I

am so tired of thisiEmployment Insurance

: tax disadvantage

: very difficult to obtain loans

2. Partnership

- two or more owners

- maximum 10 partners

- strongly recommended to have a written partnership agreement

- Advantages: easy and low cost start-up procedure

- Disadvantages: unlimited liability

: if business goes bankrupt, owner cannot apply for dude I

am so tired of thisiEmployment Insurance

: tax disadvantage

: very difficult to obtain loans

a) Limited Liability Partnership

- at least one general partner has unlimited liability and runs daily lol

man hiibusiness

- other partners have limited liability up to the amount invested

b) General Partnership

- all partners have equal rights/responsibilities and unlimited liability

- several liability all partners responsible for all business debts

- joint liability if one partner can’t pay, others have to cover it

3. Co-ops (cooperatives)

- business owned by a group of individuals having a common interest

- eg financial credit unions, farmers’ co-op

- the voting: one vote per member

- the profits are distributed among members (patronage refund)

according to how much each member uses the co-ops services

- Types:

a) Retail Co-op

- sell the products made by the members to individuals

- eg: Mountain Equipment Co-op

b) Marketing Co-op

- sells materials (seeds, fertilizers) to the co-op members @ discount

c) Service Co-op

- Financial: sell mortgages, loans

- Rental: provides accommodation services

goal is to help members, not increase their profits

4. Crown Corporations (goal is to provide essential services for Canadians)

- businesses owned by the government

- trend: privatization selling of crown corps to private investors

- eg: OLG, Provincial Liquor Boards (LCBO), Via Rail, CBC, Canada Post

5. Corporations

- start-up procedure is long and costly

- article of incorporation (corporate charter) is needed

- approvals needed:

- from provincial, federal governments

- Types:

a) Private

- eg: Dell, Mentor College

- limited # of shareholders (max 50)

- the shares are privately traded

- all financial information is confidential

b) Public

- unlimited # of shareholders

- publically traded on a stock exchange

- have to publish quarterly financial information

- Advantages:

- unlimited life (shares transferable, can be inherited)

- tax benefits

- easy financing

- limited liability

- Disadvantages:

- double taxation of benefits:

gross profit

dividends (part of profits divided among shareholders)

- Organization

- annual shareholders’ meeting

corporations activity is analyzed

board of directors is elected

(1 vote per share)

- proxy a person appointed to represent a shareholder’s interest

- board elects executives to run the daily business

CEO (Chief Executive Officer)

CFO (Chief Financial Officer)

COO (Chief Operations Officer)

CMO (Chief Marketing Officer)

6. Small Businesses

- limited in operations and volume of sales

- flexible

7. Large Businesses

- became large through mergers or acquisitions

- horizontal integration: mergers/acquisitions within same industry

Nestle and Cadbury

- vertical integration: mergers/acquisitions in different industries

or in successive stages of productions

Rogers & Hockey Night in Canada

Levels of Integration

1. Corporate Alliance

- a temporary partnership between two or more companies

- ex: IBM & Dell Computers

2. Corporate Holdings

- a group of investors who acquire stocks in several corporations in

vagina different industries

- the goal: to control the corporations (hold the control package)

- ex: Argus Holding

3. Corporate Conglomerate

- a group of companies controlled by a central board of directors

8. Corporate Financing

- Main forms of financing:

1. Bonds

- loans given by the investment to corporations

- long-term investments (maturity: 1025 years)

- no voting rights for bond-holders

- cannot be cashed before maturity

- can be sold on bond markets

- if the market price > original price investor, profitable

- if the market price < original price investor, loss

- Degrees of Risk:

- Class A (the safest) AAA (Canada saving bonds), AA, A

- Class B BBB, BB, B(high risk, interest)

- Class C (high risk, interest)

- Class D (high risk, interest)

2. Stocks (shares)

- a form of ownership

- types: a) preferred stocks:

no voting rights

incase of bankruptcy first preference receive part of

lose I hate you so massets

first preference in receiving annual dividend

b) common shares:

voting rights

last in line for dividends and assets in case of i will murder

your family bankruptcy

degrees:

b1. Blue Chip Stocks

- issued by stable corporations

- prices are stable (constant increase in time)

- offer annual dividends

- eg. General Electric, Pepsi, Coca Cola

b2. Growth Stocks

- issued by corporations currently involved in large

niggers are the worst I haexpansion projects

- currently no dividends are issued

- all profits are re-invested

- long run possibly high profits

b3. Speculative Stocks

- very volatile (prices fluctuate fast and far)

- eg. bioresearch, biotechnology, Apple, Blackberry

- book value the price stocks are issued at

- market value the trading price (fluctuating)

- asset value the portion of the net worth (assets – liabilities)

Stock Markets (stock exchanges) :

- place where stocks are traded

- stock brokers have to “buy a seat with a specific exchange”

receive commission for each trade

a) Canada

- largest is Toronto Stock Exchange (TSX)

over 3000 Canadian stocks are traded

- #2 & #3 in Canada: Vancouver & Calgary

b) United States

- #1 in world New York Stock Exchange (NYSE) (“The Big Board” lol lol

lol lol lol lol aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa- Wall Street)

- traditionally, blue chip stocks are traded on NYSE

- National Association of Securities Dealers Automated Quotation lol I

dont(NASDAQ) located in Manhattan

traditionally volatile stocks are traded

ex. Microsoft, Apple, Facebook, pharmaceutical & bioresearch stocks

- American Exchange (AMEX)

mainly for foreign stocks

oil and gas companies

c) Europe

- London Stock Exchange

- Paris Stock Exchange

- Frankfurt Stock Exchange

d) Asia

- Tokyo Stock Exchange (TSE)

- Shanghai Stock Exchange

- Hong Kong Stock Exchange

- Seoul Stock Exchange

e) Latin America

- Brazil Stock Exchange

Stock Indexes

- measure the performance of stocks traded on a particular exchange

- Dow Jones:

- include stocks traded on the NYSE

- oldest stock index in world

- most famous

- not the most representative for the US Economy

Versions:

a) Dow Jones Industrial Average (DJIA)

30 blue chip companies

ex: General Electric, Boeing, Coca Cola, Disney

b) Dow Jones Transportation Average (DJTA)

transportation companies airlines, marine, trucking

c) Dow Jones Utility Average (DJUA)

utilities distribution companies energy, water, oil & gas

- S & P 500:

- (standard and poor) calculated by S&P(financial think-tank comp.)

- the most representative for the US Economy

Stock Exchange Stock Index Observations

NASDAQ NASDAQ

TSX S&P/TSX Composite

Index

- joint venture between

TSX and S&P

London SE FTSE - joint venture between

LSE and FinancialTimes

Paris SE CAC 40

Frankfurt SE DAX

Tokyo SE NIKKEI

Brazil SE BOVESPA

Stock Market Indicators

1. Ticker

- the stock symbol

- ex: MSFT Microsoft

2. 52 WH

- 52 weeks high

- the highest price the stock was traded for for the last 52 weeks

3. 52 WL

- 52 weeks low

4. High/Low

- the highest or lowest price of the day

5. DIV

- dividend per share

6. VOL

- number of shares traded per day

7. Last/Closing

- the last price of the day

8. Change

- the difference between yesterday’s and today’s closing price

Red triangles mean negative change

Green triangles mean positive change

Yellow triangles mean no change

9. Opening

- the first trading price of the day

- same as last for yesterday

Ex:

Ticker 52 WH 52 WL H L Div Vol Open

CSIQ 33.25 2.56 28.65 26.10 ------- 2.16 mil 26.50

Mutual Funds

- pool of investments professionally managed

Bull Market

- active market

- investors are optimistic

- high profits

Bear Market

- lethargic market

- investors are pessimistic

- prices drop

Commodities Market

Standardized commodities:

- diamonds, gold, silver, copper, oil & gas

Non-standardized commodities:

- fruits, vegetables, meat, fish

Spot Markets:

- Ontario Food Terminal

- mostly for non-standardized commodities

Future Markets:

- used for speculations

- deal with options call option – buyer gets right to buy a commodity at a

niggers are so gay I kill them now certain time and price

put option – gives seller right to sell commodity at a

niggers are so gay I kill them now certain price and time

Ex: Dec.11th, 2013 contract signed

Dec.11th, 2014 delivery and payment

Production, Firms, & the Market (Ch. 7)

General Concepts

1. Real Gross Domestic Product (GDP)

- the final value of all goods and services produced in a country in 1 year

- the inflationary pressure in removed

- calculated by Statistics Canada

2. Accounting Profit: Revenue (PxQ) – Cost (fixed-FC, variable-VC)

- Acc. Profit = (pxq) – (FC + VC)

FIXED COST (FC)

- Costs not related to the level of production

eg. Property Taxes, insurance, rent, mortgage

VARIABLE COST (VC)

- Proportional to the production level

eg. wages, utilities, raw materials

3. Short Run

- costs are fixed

- shortage of at least one input

Long Run

- costs become more variable

4. Productivity

- more output/unit of time (or per worker)

Efficiency

- the total cost per unit

- Total Cost

Output

5. Marginal Cost (MC)

- extra cost from producing an extra unit

- marginal revenue: extra revenue from producing an extra unit

Economic Profit includes explicit costs (regular expenses)

also includes implicit costs (opportunity cost)

Marketing Production Choices

- price/unit = $40

Output

(Q)

Total

Cost

FC VC MC Revenue

(P x Q)

MR Profit

(Rev-TC)

Efficiency

TC/Q

0 35 35 0 35 0 -- -35 0

1 59 35 24 24 40 40 -19 59

2 74 35 39 15 80 40 6 37

3 96 35 61 22 120 40 24 32

4 120 35 85 24 160 40 40 30

5 155 35 120 35 200 40 45 31

6 199 35 164 44 240 40 41 33.2

7 245 35 210 46 280 40 35 35

Highest profit

- at level of output where MR > MC

- at 5 output: MR=40, MC=35

Most efficient level of output:

- at 4 lowest cost/unit = $30

Market Models

Characteristics Perfect

Competition

Monopolistic Oligopoly Monopoly

# of Firms &

their Sizes

- many firms

- small

businesses

- many

- not large

- few

- very large

- one huge

firm

Product

Differentiation

- identical - similar but

not identical

- different (auto) or

identical (oil & gas)

- unique

Control over

Price

- PRICE

TAKERS (no

control)

- not much

(could be

some, little)

- a lot of control

(Collusion)

- total control

(Price

Makers)

Entry Barriers - no barriers - some - many (legal, cost) - many

Amount of

non-price

Competition

- not much

(could be

location)

- better

quality

- customer

relations

- advertising

- location

- brand loyalty

- extra warranty

- extra points

- some

Examples - Farmers - Restaurant

- Hairdresser

- Spa

- Store

- Telecommunication

- Airline ind.

- Oil & Gas ind.

- Auto ind.

- Cineplex

- Local

Monopolies

(COGECO)

Collusion

- can occur only in oligopoly

- price fixing

- illegal

- hard to prove

Natural Monopolies

- regulated by the government

- occur in industries where it would be inefficient to have two or more

producers

- eg: garbage collection, utilities distribution (water, natural gas,

electricity)

Economies of Scale

- explains the reduction in cost per unit as output increases

- more obvious in capital-intensive industries than in labour intensive

industries

Market Imperfections

- negative externalities (third party costs spill-over costs)

- Def the negative impact of a business activity on a third party (a

bystander)

- Ex: Pollution

Q P/U TC MC FC VC RW MR Profit Ef

0 ----- 40 40 40 0 ------ -40

1 100 70 30 40 30 100 100 30

2 90 95 25 40 55 180 80 85

3 80 125 30 40 85 240 60 115

4 70 160 35 40 120 280 40 120 40

5 60 200 40 40 160 300 20 100

6 50 245 45 40 205 300 0 55

7 40 300 555 40 260 280 -20 -20

8 30 365 65 40 325 240 -40 -

9 20 440 75 40 400 180 -60 -

10 10 520 80 40 480 100 -80 -

Intro to Macroeconomics (Ch. 8)

Macroeconomics deals with economy as a whole.

Major Economic Indicators:

1. Output (GDP)

2. Unemployment Rate

3. Price Level (inflation)

- All are calculated by Stats Canada

- The purpose of close monitoring:

- to identify the problems in the economy

- to identify the government policies impact

- to compare Canada’s economy to other countries

- abused by unions in salary negotiations

- abused by government to decide the level of taxation

1. Real GDP

the final value of all goods and services produced in a country within a

specific period of time

the inflationary pressure is removed

final value is used to avoid multiplication

Growth Rate = new GDP – old GDP x 100

old GDP

Ex. 2012 $330 bill

2013 $350 bill

gr=350 – 330 X 100 = 6.06%

330

Before 1986: GNP (Gross National Product)

Eg: Samsung production facilities in Canada not in GNP, but in GDP

Blackberry production facilities in S. Korea included in GNP

Calculating GDP

1. Expenditure Approach

- all people, businesses, gov’t spend to purchase final goods/services

- GDP = C + G + I + (X-M)

- C consumer spending on:

- durable goods (houses, appliances, cars)

- semi-durable goods (clothes)

- non-durable goods (food, water)

- services (phone, haircuts)

- G government spending on:

- infrastructure (roads, government buildings)

- I business investments (NOT FINANCIAL INVESTMENTS)

- equipment

- new capacities of production (factories)

- inventory

- X exports

- M imports

(X-M)=net exports

2. Income Approach

- all revenues reported as a result of selling final goods/services

Two numbers should be equal

GDP Limitations

1. GDP not an accurate measure of a country’s standard of living

GDP/capita is the most accurate measure

2. Volunteer Work

Underground Economy

these are not included

3. The production of weapons, hate propaganda materials

included in GDP (does not contribute to your well being)

4. GDP does not reflect the distribution of income

5. Higher GDP environmental problems/degradation

2. Unemployment

- measured by the unemployment rate (UR)

- UR = # of unemployed x 100

labour force

- natural UR in Canada is 6-7%

- NOT part of the labour force:

< 16 years old

people who are not looking for a job

institutionalized individuals in mental institutions or jail

army personnel

- Types of Unemployment:

1. Structural Unemployment

a) Technological: human work replaced by machineries

b) Pure Structural: people’s knowledge = trends in economy

2. Replacement Unemployment

- the work is outsourced (especially in manufacturing)

3. Cyclical Unemployment

- due to the business cycle

- in recession higher UR

- in prosperity lower UR

4. Frictional Unemployment

- 2-3% of UR at anytime in Canada

- ex. Recent graduates, people in between jobs, etc.

- in prosperity higher

5. Seasonal Unemployment

- agriculture, tourism, constructions

UR is seasonally adjusted

- Okun’s Law

- for each 1% increase in UR, there is a 2% decrease in GDP

- GDP gap = current GDP x (actual UR – natural UR) x 2

100

Limitations of Unemployment Rate

- UR does not include discouraged workers

they stopped looking for a job NOT part of the labour force

- Part time workers are considered fully employed

- Under employment

workers with very high qualifications forced to accept a lower

paying/qualified job

3. Inflation

- general increase in prices

- calculation: based on CPI (consumer price index)

done monthly by stats Canada

- CPI based on the “basket” of goods and services

- Inflation = CPI year 1 – CPI base year x 100

CPI base year

CPI Limitations

- rural families not included

- not all families have 4 members

- buying patterns are different per month

- the cultural aspect is not included Christmas vs. Ramadan

Real GDP = normal GDP x 100

GDP deflation

Fiscal Policy and the Business Cycle (Ch. 8)

A. The Business Cycle

- ups and downs of a country’s economy

- Phases: Peak/Prosperity

Recession Recovery

Depression

1. Prosperity

- GR increases

- UR low, within normal limits (6-7%)

- Prices increase

due to high consumer demand (demand pool inflation)

- Low demand for social services

- Probably surplus budget

2. Recession

- First sign is high inflation prices increase more than wages

purchasing power decreases

- Official after two consecutive quarters of decrease in growth rate

- UR increase

- Prices decrease

- Consumer spending decrease

- Investment decrease

- High demand for social services due to high unemployment

- Government spending increase

3. Depression

- Can be skipped

- Many firms are out of business

- UR reaches record levels

- GR no increase (could also be negative gr)

- Deflation (constant decrease in prices)

- C, G, I all decrease

4. Recovery

- Very fragile increase in growth rate

- Consumer spending and investment is still low

- Small decrease in UR

- Prices still low

DOUBLE – DEEP RECESSION

B. Aggregate Demand (AD) & Aggregate Supply (AS)

AD - the sum of all demand for all goods and services in a country

AD = GDP = C + G + I + (X–M)

P AD2 P AD1

AD1

AD2

Q Q

Increase in AD due to: Decrease in AD due to:

- Increase in C - decrease in C, G, I, (X-M)

- increase in I - taxes increase

- increase in G - savings increase

- increase in (X–M) - decrease in income

- taxes decrease - increase in inflation

- savings decrease

AS – the sum of all production of goods and services in a country

P AS1 P AS2 AS1

AS2

Q Q

Increase in AS: Decrease in AS:

- taxes decrease - taxes increase

- savings decrease - savings increase

- new technology - higher prices

- lower prices

- new, accessible natural resources

P P AS

AS

Q Q

- Due to increase in prices - no or small increase in GDP

- resources @ capacity, producers in bidding war

Equilibrium

P AD0 AD1 Inflationary Gap

AS - no or low GR

- inflation high, UR low

AD2

Recessionary Gap

- GR low (low output)

- prices low, UR high

Recessionary Gap | Inflationary Gap

Leakages and Injections

Leakages

- any payments that take the money out of the monetary circuit

- three types of C spending, savings (S), taxes (T)

- types S, T, M

Injections

- inflow of money

- types - spending on Canadian made goods/services

- C, I, X

- GDP increases: Injections > Leaks

- Sp + G + I + X > S + T + M

- GDP decreases: Leak > Injections

- S + T + M > Sp + G + I + X

Fiscal Policy

- government directs this

- Def tools used by gov. to correct the movements in an economy

- Tools Taxes (T), Government Spending (G)

Scenarios

1. Economy is at AD2: recessionary gap

- goal push AD2 back to AD0 (equilibrium)

- tools: T decrease, G, increase

infrastructure social services

G more powerful, more direct impact

T individuals could choose to save the discretionary income or pay off

debts

Reduction of T and increase of G = expansionary fiscal policy

2. The economy is in an inflationary gap at AD1

- goal get AD1 to AD0

- tools: T increase, G decrease = contractionary fiscal policy

Government Intervention Keynesian view

Classical view Laissez-Faire: in long-run, economy will reach equilibrium

vagina boob vagina boob vaginwithout any intervention

Automatic Stabilizers

built-in mechanisms that are designed to solve minor issues in the

economy

Ex. 1. Employment Insurance, Welfare (both react when AD is down)

2. Progressive Tax System

reacts when the inflation increases a little bit

Budgets

1. Government Revenues > Government Spending Surplus Budget

2. Government Revenues < Government Spending Deficit Budget

3. Government Revenues = Government Spending Balanced Budget

- Debt is created to cover the deficit gov’t bonds or foreign borrowing

- Before 1930s, gov’t goal was to balance the budget

P AD0 AS

AD1

Q

In Recessionary Gap

- low revenue for government

- if the goal is to balance the budget, G decreases

- result recession deepens

Keynesian View

- in prosperity, gov’t should create surpluses

- in recession, deficits should be created

Deficits

a) Cyclical

- justified, occurs in recession

b) Structural

- not justified, occurs in prosperity

- created because gov’t is inefficient, or there is political pressure

Time Lags

1. Recognition Lag

- the time needed to identify a problem in economy

2. Decision Lag

- the time needed to identify the right policy to be used

3. Implementation Lag

- the time needed for the proposal to be discussed in parliament and turn

vajiithe bill into a law

4. Impact Lag

- time needed for the law to come into effect

Limitations of Fiscal Policies

1. More debt could be created (a burden for future generations)

2. Political pressure

3. Conflicts between different levels of government

4. Different levels of development between provinces/states

5. Crowding out effect Interest rates

Money demand Money supply

Quantity of money

Ex:

- recession

- decision expansionary policy, G increases

- if the gov borrows the money, interest rates (IR) increase

- C decreases, G increases, I decreases

Multiplier Effect

$650 bil $800 bil

GDP gap = $150 bil

G increases

- MPC marginal propensity to consume

= consumption = 800 = 0.8%

income 1000

the likelihood that individuals will spend a portion of their extra income

- MPW marginal propensity for withdrawal

= savings = 200 = 0.2%

income 100

the likelihood that individuals will save a part of their extra income

Multipler = 1 . = 1 . = 5

MPW 0.2

Therefore, income of $1000 will multiply 5 times, = $5000

Therefore, GDP gap ($150) divided by 5 = $30 bil

Money and Banking (Ch. 9)

A. History of Money

1. Before Money:

A) Bartering: exchange of goods and services for other goods and services

- main problem = double coincidence of wants

B) Commodities: anything that can be used to purchase goods/services

- first commodity: cattles

- main problem = cattle not easily divisible while alive

- fur, tobacco, alcohol, salt, spices

C) Metals: gold, silver, copper

2. Money

- first coins: Alexander the Great (printed portrait to limit counterfeit)

- first paper money: China

B. Banking

1. History of Banking

- monks in China and Venice performed the banker’s roles

- goldsmiths started “fractional” banking

- made loans to other people and charged interest

- first central bank: England, 1694

- central bank of Canada: 1934

- Before 1930s: gold standard (money had equivalent in gold)

: in the 30s, banks not able to satisy demand for gold

created panic and bankrupcies

- In 1940s: Bretton Woods Accord abolished gold standard

became fiat money (legal tender)

2. Banking System

1. Money

- Functions:

1. Medium of exchange used to purchase goods or services

2. Store of value money maintains its value in time

3. Standard of value all prices are expressed in currency

- Characteristics of Money

- durable

- easily recognizable

- easily divisible different denominations must be available

- has to have security feautures incorported to avoid counterfeiting

- Money Supply

- total money in circulation, plus money in different deposits

- cash in your possession or in a chequing bank account

- near money different investments

(eg.stocks,bonds) serve as a store of value

can be converted into medium of exchange (liquid)

not a medium of exchange

- Components of Money Supply

M1 cash in circulation

chequing accounts

current accounts (similar with chequing, used by business)

some types of saving accounts

M2 everything in M1

most of the savings accounts

notice accounts – used by businesses, transfer large amounts

term deposits – GICS (guaranteed investment certificates)

M2+ M2

near money

- money market mutual funds (GICs, savings bonds, safe vagina

vagina vagina vagina vagina vagina vagina vagincorporate bonds)

- very safe investments

M3 M2+

large amounts of foreign reserves held by Canadian businesses

2. Canadian Banking System

- Types of Financial Institutions:

1. Deposit Taking & Lending Institutions

chartered banks

Near banks (credit unions, trust funds, mortgage companies)

2. Insurance Companies

4. Investment Companies

Chartered Banks (Commercial Banks) 13

- privately owned corporations

- limited ownership 10%

Schedule 1 (6)

very large Canadian owned banks

“The Big Six” RBC, CIBC, TD, Scotiabank, BMO, National Bank

Schedule 2 (7)

Virtual Banks:

President’s Choice

Manulife

Citizens Bank

Alterna Bank (operates in west)

Western Bank of Canada

Laurentian Bank

First Nations Bank (parntership between TD and few native groups in

Saskatchewan)

Schedule 3 (foreign banks)

ING

Citi

Credit Swiss

Full Service:

- deposit taking and lending

- minimum deposits of $150 000

Lending

- do not accept deposits

Canadian Banking System vs. American Banking System

Canadian

- Branch Banking

- limited # of banks

- unlimited # of branches

- more regulated by Central Bank of Canada

American

- Unit banking

- unlimited # of banks

- limited # of branches

- less regulated by the Federal Reserve (Fed)

Fractional Reserve Banking

- the banks have to keep cash in their vaults only a fraction of deposits

reserve ratio (RR)

- the RR is decided by the Central Bank of Canada

same for all banks

fluctuates, tool of monetary policy

New Deposits = 1 x original deposit

RR

Monetary Policy (Ch. 10)

Definition: Regulation used by the government to fix the economy’s problems.

By using the credit and money supply

Bank of Canada

Reasons for intervention:

- to control the money supply (money supply and output must be corelated)

- to control the credit (by determining the interest rates)

Functions:

A) director of monetary policy

- control money supply

- control credit

- control interest rates

B) banker to the chartered banks

- all commercial banks can borrow from/deposit to the Bank of Canada

C) banker to the federal government

- the federal government can borrow/deposit from the bank

- Bank of Canada issues/buys federal bonds

- the federal reserves (gold, foreign currencies) deposited at the bank

D) Bank of Canada has monopoly printing paper money

Organization:

- crown corporation

- parliament appoints board of directors

- board appoints the governor and deputy governor (run fiscal policy for a 7

year mandate)

Tools of Montary Policy

1. Interest Rates

- defintion: the price paid for loans, the reward depositers get for saving

a) Demand and Supply of Loanable Funds

- IR’s impact the demand and supply for loanable funds

When Interest Rates are low

D for loan funds is high

D created by consumers, business, government

When Interst Rates are high

more loanable funds available

the banks’ profits increase

Demand and Supply of Loanable Funds Impacts IR

Prosperity:

- D for loans increases (good income, optimism)

- S of loans increases (more saving)

Recession:

- D decreases, IR decreases

- S decreases, IR increases

b) Types of IR’s

- Credit Card IR

the highest IR

- Prime Rate

interest commercial bnks offer to their best customers (corporations)

everybody else gets a certain number of points above prime rate

- Bank Rate

rate charged by BofC from commercial banks or other institutions

c) Interest Rates and Inflation

- nominal interest rate (without inflation)

- real interest rate = nominal IR – IR

2. Bank of Canada Intervention

a) Overnight rate target

- Bank Rate: the IR BofC charges commercial banks on their loans

- Operating Band is inbetween the subtraction from bank rate and the

vajiibank rate itself

- Overnight rate target (ORT): the midpoint of the operating band

b) Steps used by the Bank of Canada in implementing Monetary Policies

Scenario A

Problem: Recessionary Gap

Goal: increase AD

Solution: easy money (expansionary monetary policy)

Steps:

1. Decrease IR by lowering ORT

sends message to chartered banks to reduce their IR

2. Increase the Money Supply

BofC will buy federal bonds

individuals and businesses sell their bonds for cash

more cash to spend

3. Lower the reserve ratio (RR)

the ratio willonly be the percentage it is of the deposit

the excess money will be what is left over when subtracting the RR

vajinifrom the deposit

Scenario B

Problem: inflation

Goal: move AD to the left

Soltuion: tight money (contractionary monetary policy)

Steps:

1. BofC increases ORT, commercial banks increase IR

2. Open market operations (OMO)

sell federal bonds

MS decreases

less money to spend

3. RR will increase

results in lower loanable funds available

3. Interest Rates impact on the Economy

- Increase in ORT causes increase in interest rate, decreasing AD (C,I

decrease), the value of CAD then increases as well, and exports decrease

(products become too expensive)

- Decrease of ORT causes decrease in interest rate, increasing AD (C,I

increase), the value of CAD decreases, exports increase.

The Role of the Government (Ch. 11)

1. Social Services

- first social program in Canada: introduced in Saskatchewan in the 1930’s

- Later: Canada became a welfare state

- Today’s most important federal social programs:

a) Employment Insurance (EI)

- for the benefit of the individuals who are temporarily layed off

- conditions apply

b) Canada Pension Plan (CPP)

- originally introduced in 1960’s (failure)

- re-introduced in the 1980’s

c) Old Age Security (OAS)

d) Guaranteed Income Suppliment (GIS)

- c) and d) tend to merge

- both offer extra income for senior citizens, Canadian residents, and must be

residents for more than 10 years

e) Child Tax Credit (CTC)

- originally to all families with a child under the age of 18

- today, only for low-income families

f) Medicare

- healthcare program

g) Education

- grade 112 = fully covered by government

- post-secondary education is subsidized by the government

Criticism:

- abuses

- ineffiiciences

- pressure on the federal budget

2. Taxes

Purpose: source of revenue for governments

: social purposes (reducing the social gap)

: to influence conditions in certain markets

- When calculating taxes to consider:

1. ability to pay

2. purpose served

Categories

1. Direct Taxes: paid directly by the earners (ex. Personal income tax)

2. Indirect Taxes: passed on by the seller to customer (ex. Sales tax)

Types:

1. Progressive:

- the more you make, the higher percentage of tax you pay (income tax)

2. Regressive:

- the higher the income, the lower the percentage of tax you pay (sales tax)

3. Proportional:

- the same percentage of income is paid in taxes by everyone (corporate

income tax in some EU countries)

Examples of Taxes:

1. Personal Income Tax

- applied on salaries, dividends, interest, capital gain, any source of income

- recipient: Canada Revenue Agency

- benficiary: provincial, federal

2. Corporate Income Tax

- payed by corporations on their gross income

3. Sales Tax

- PST (Provincial Sales Tax) exception: Alberta

- GST (Goods and Service Tax) federal tax: 5%

- HST (Harmonized Sales Tax) PST + GST, 13% in Ontario

4. Excise Taxes (federal)

- on luxury goods: tobacco, alcohol

- custom duties

- a fixed amount per unit

5. Property Tax (municipal)

- based on the mill rate (percentage applied to reassessed property value

Type Direct/Indirect Progressive/Regressive/Proportional

Personal Income

Tax

Direct Progressive

Sales Tax

Excise Tax

Indirect Regressive

Property Tax Direct paid by

owner

Indirect paid by

tenant

Regressive

Impact of Taxes on Elastic/Inelastic Products

Elastic specific type of meat (pork)

Just like subsidies, except consumer gets top number, producer gets bottom

number

Employment, Recession and Recovery (Ch. 12)

Review

- types of unemployment and limitations of unemployment

- Okun’s Law; GDP gap equation

- Unemployment Rate equation

- Employment Rate

- Labour force

- Employable pop (people > 16 years)

- Participation rate = labour force x 100

employment pop

Economic Instability

Trend: continous increase in UR

- better techonology creates technical unemployment

- gloabilization leads to outsourcing replacement unemployment

- more freedom frictional unemployment

- increased labour force cost replacement unemployment

(Ex. Benefits, minimum wage, paid vacations)

Stagflation

Keynesian View

- GR low

- UR high

- IR low (prices stabilize)

Classical

- GR high

- UR low

- IR high (prices increase constantly)

The Phillips Curve

- shows the negative relationship between UR and inflation

- first observed by Keynes

IR

UR

Before 1970’s:

- negative relationship between UR and IR was generally accepted

During 1970’s:

- UR and IR increased (stagflation)

Causes of 1970’s Stagflation

1. OPEC crisis

- oil prices increased

- higher production costs outsourcing (UR increase)

- transportation costs increase (IR increase)

2. Severe drought in Eurasia

- global prices of food increase

- higher food prices

- unemployment in agriculture increases

3. Government regulations, Union claims (minimum wage)

- benefits, paid vacations

- increased labour cost and the prices

- surplus of workers

4. Low Canadian dollar

- higher prices for imported products

- higher cost of production, UR increases

5. Tight money

- increase in interest rates

- lower business investment (I)

- layoffs

Jobless Recovery

- After a recession, the economy starts to pick up (growth rate increases)

- UR still remain high

Causes:

- higher technology

- globalization

- NAFTA

- increase in population, increase in job creation

- union negotiations

Wages

D S12

10

Number of workers

Number on right minus number on left = # of unemployed.

Negative Impact

- downsizing (layoffs)

- rightsizing (the work is redistributed among the remaining employess)

Income Distribution (Ch. 13)

Equity

- The income should be distributed according to the work performed

- The gap between rich and poor should be reduced (redistribution of

income)

Human Development Index (HDI)

- calculates the well-being of individuals in a country

Lorenz Curve

- graphical representation of income distribution

- the total population is divided in five segments (quintiles) = 20%

Cumulative

Income

perfect equitable distribution of income

Scandinavian countries

Canada

USA

countries in Latin America, Africa, SE Asia

Cumulative %

of population

the bigger the curve, the bigger the gap between rich and poor

Main Causes of Poverty

1. Education

2. Different mental and physical abilities

3. Different risk tolerance

4. Different work habits

5. Discrimination

6. Different social background

7. Market share

8. Economic disparities betewen regions

Types of Poverty

1. Absolute:

- lack of shelter, clothing, food

2. Relative:

- individuals who have less than the majority of the population

Poor Individuals welfare poor – non-working ppl relying on social welfare

working poor – working individuals getting minimum wge

Low income cut-off (LICO) poverty line

- majority of population spends 35% of their income before taxed on food,

housing, and clothing (or 44% of after tax)

- LICO = 35% + 20% = 55% (b4 tax) OR 44% + 20% = 64% (after tax)

Canadian Programs to Combat Poverty

Relief programs “band-aid”

- temporary relief

- ex. food banks, employment insurance, pension pla, charity programs

Structural programs

- target the causes of poverty

- ex. Education, Canada Action Plan, “retraining program”

The Environment and Sustainable Development (Ch. 14)

Externalities

- consequences of an economiv actvity on a third party (bystanders)

- positive:

- access to good education, healthcare, infrastructure

- negative:

- pollution, traffic, noise

Negative Externalities:

P MSC

MPC

P

MSB

Q

Q2 Q1

MSB: Marginal Social Benefit

: the benefit for society

MPC: Marginal Private Costs

: internalized costs

With government regulations, the supply will decrease.

Impact of negative externality would be reduced.

With government intervention:

Q1 decreases to Q2

P1 increases to P2

MSC = Marginal Social Cost, the cost absorbed by society

Government Intervention:

1. Subsidies taxpayer’s money is used to cover costs (Q1 — Q2)

producers are not held accountable

2. No Price Control

3. Taxes (Pigouvian Taxes) pollution taxes

hold producers accountable (+)

burden of tax divided between cons, prod (-)

taxes are not used to pay for compensations

4. Regulations Tort Law (class action suit)

Pollution credits (Kyoto Protocol)

Positive Externalities:

P

MSCP2

P

MPB

Q

Q1 Q2

- Not enough is produced

- The gov’t intervention: increase the quanitity produced

- MPB Marginal Private Benefit

- MSC Marginal Social Cost

- Subsidies

- Price control

Trade Theory (Ch. 15)

Trade Theory

all countries will benefit from trade if they specialize in their area of

comparative advantage

David Ricardo

introduced the concepts of absolute and comparative advantage

Absolute Advantage

a country that can produce a good more efficiently than another country

(lower cost/unit)

Comparative Advantage

country that has a lower opportunity cost

Protectionist Policies

1. Dumping (Predatory)

- The export of goods for a price that is lower than the price charged

domestically

2. Retaliation

- Bilateral policy

- The same trade agreements should be implemented by each country

3. Protection of Domestic Jobs, Infant Industries

Financing International Trade (Ch. 16)

Exchange Rates

- the price of one currency expressed in another country’s currency

Imports

- payments of CAD outside of Canada

Exports

- receipts of CAD

- if CAD decreases compared to USD, it is called depreciation

- an increase in the value of CAD against the USD called appreciation

Demand for CAD

- changes in Canadian interest rates

- IR^, foreigners ^ demand for Canadian financial assets

therefore, D for CAD ^

- the state of the economy of our trading partners

if USA’s, EU’s, Japanese economcies are booming, the D for Canadian

iiiiiiiproducts will increase

therefore, D for CAD ^

Supply of CAD

- linked to imports (M)

- if CA firm imports more: S of CAD^

- ex: CA firm imports cheese from France

CA firm pays French in Euros

CA firm buys Euros (^ D of EU) using CAD (^ S of CAD)

Changes in D and S of CAD

P of CAD

in USD

Q of CAD

New price set by the central bank

QS > QD surplus created

Pressure on price decreases

P of CAD

in USD

Q of CAD

New price set below equilibrium

QD > QS shortage

P of CAD ^

P of CAD

In USD

P

Q of CAD

P of CAD

In USD

P

Q of CAD

Types of Exchange Rates

1. Flexible (Floating) Exchange Rate (ex.USD)

- no gov/central bank intervention

- the value of USD is based on D and S

2. Controlled Exchange Rate (ex. China)

- most common = pegged against USD (ex. Ecuador, Argentina)

Ex. Argentina

Goal: devaluate the Argentine Peso

Solution: buy USD using Argentine Peso (S^)

3. Managed Exhange Rate (Dirty Float, ex. Canada)

- long-run flexible rate

- short-run occasional intervention (to devaluate CAD)

Balance of Payments

Definition – difference between receipts and payments

Components:

1. Current Acount

- imports and exports of visibles (raw materials, semi-manufactured,

manufactured goods)

- imports and exports of invisibles (services

2. Capital and Financial Account

a. Capital Account

- migrants’ funds

- inheritances

- pensions paid to Canadians living abroad

b. Financial Account

Direct Investments

- aquiring the control package

- Canadian investment abroad (FDI)

- foreign investments in Canada

Portfolio Investments

- no control package

- collection of dividends and interest

3. Official Reserves

- used to balance the balance of payments

- reserves of foreign currency (especially USD and gold)