Ch.4 Economics

The government uses two major price indexes to evaluate inflation:

-Consumer price index (CPI) -the Producer price index (PPI)

Categories of unemployment

-Frictional unemployment -Structural Unemployment -Cyclical unemployment -Seasonal unemployment

Four degrees of Competition

-Pure competition -Monopolistic competition -Oligopoly -Monopoly

The Bank of Canada

-Sets Canada's monetary policy -Provides banking services to member banks and the federal government -Responsibilities are defined in the Bank of Canada Act -Exists "to regulate credit and currency in the best interests of the economic life of the nation" -Their actions directly influence inflation, employment and production and therefore affect the standard of living for all Canadians -Helps guide the economy by influencing the size of the money supply

Bank of Canada Reserve Requirements

-The Bank of Canada eliminated reserve requirements so that Canada's large banks could effectivley compete with other financial institutions not required to carry reserves. -However, to help ensure that banks manage their reserves effectively, the Bank of Canada charges member banks a penalty when they must borrow to cover withdrawels

Bank of Canada Role as a banker

-The bank of Canada coordinates the cheque-clearing process for cheques on behalf of any banks willing to pay its fees -As the governments bank, the Bank of Canada maintains the federal governments checking account and keeps the Canadian currency supply in good condition

The fundamental rights of capitalism

-The right to own a business and keep after-tax profits -The right to private property -The right to free choice -The right to fair competition

Money supply and interests rates

-When the economy is good and prices are high, the Bank of Canada attempts to reduce the money supply, which increases interest rates (less money available), which will reduces spending and keep inflation under control. -When the economy is too sluggish, the bank increases the money supply. When more money is available, interest rates tend to drop, encouraging businesses and consumers to spend -The bank uses 2 key tools that expand and contract the money supply: Open market operations and discount rate changes

Canada Deposit Insurance Corporation (CDIC)

A federal crown corporation that insures deposits in banks and thrift institutions for up to $100 000 per customer, per bank -Not a penny in insurable bank deposits were lost when small banking institutions failed in the 1980s and 1990s because of the CDIC

Economy

A financial and social system of how resources flow through society, from production to distribution to consumption

Natural Monopoly

A market structure with one company at the supplier of a product because the nature of that product makes a single supplier more efficient than multiple, competing ones. -The government grants monopolies to individual companies and then regulates them to ensure they don't abuse their privilege -e.x. Cable television

Consumer Price Index (CPI)

A measure of inflation that evaluates the change in the weighted-average price of goods and services that the average consumer buys each month -"market basket" is updated periodically to reflect changes in consumer spending

Producer Price Index (PPI)

A measure of inflation that evaluates the change over time in the weighted-average wholesale prices, or the prices that businesses pay each other for goods and services -changes in the PPI can predict changes in the CPI, increased prices tend to be passed onto consumers

Open Market Operations

A monetary policy tool in which central banks buy and sell bonds to regulate the money supply in the economy

Contraction

A period of economic downturn, marked by rising unemployment -the very bottom of the contraction is called the trough

Deflation

A period of falling average prices across the economy -Typically a sign of economic trouble that goes hand in hand with high unemployment

Inflation

A period of rising average prices across the economy -A low level of inflation reflects a healthy economy

Recovery

A period of rising economic growth and employment -The transition period between contraction and expansion

Expansion

A period of robust economic growth and high employment -The height of economic growth is called the peak of the expansion

Disinflation

A period of slowing average price increases across the country

Reserve Requirements

A rule that specifies the minimum amount of reserves (or funds) a bank must hold expressed as a percentage of the banks deposists

Economic System

A structure for allocating limited resources -no system is perfect and therefore there isn't one standard approach

Monetary Policy

Actions that shape the economy by influencing interest rates and the supply of money -The federal government manages Canadian monetary policy through the Bank of Canada

M2

All M1 plus most savings accounts, money market accounts and certificates of deposit (low risk savings vehicles with a fixed term, typically less than one year)

M1

All currency - paper bills and metal coins - plus checking accounts and traveller's cheques

Hyperinflation

An average monthly inflation rate of more than 50 percent

Communism

An economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong, central government -Karl Marx -Most imposed authoritarian governments that suspended individual rights and choices -Corruption in government -Shortages and surpluses develop with free market -Remaining communist countries (North Korea and Cuba) continue to falter

Recession

An economic downturn marked by a decrease in the GDP for two or more consecutive quarters

Capitalism

An economic system based on private ownership, economic freedom and fair competition. Also known as the private enterprise or free market system. -Adam Smith -private-sector businesses are free to make their own choices (what they will produce, who they will hire) as well as individuals (what they will purchase, where they will work) -As companies compete to attract the best resources and offer the best values, quality goes up, prices remain reasonable and choices proliferate, raising the standard of living in the economy as a whole

Socialism

An economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare, such as utilities, telecommunications and health care -Higher taxes to distribute wealth more evenly -Tax revenues fund services such as free child care, free university and free public health care systems -Found in most Western European countries -Cons: Potential entrepreneurs may migrate to countries that let them keep more of their profits and workers with abundant benefits may find themselves losing motivation

Depression

An especially deep and long-lasting recession -Rare thanks to proactive interventions from governments

The right to private property

Anyone can buy, sell and use property (land, machines and buildings) in any way that makes sense to them -includes right to will property -exceptions are minimal government restrictions

The right to fair competition

Drives higher quality and lower prices and provide more choices -The governments role is to keep a level playing field by establishing regulations and monitoring the competition to ensure compliance

Planned Economies

Economies that are heavily controlled by the government -Socialism -Communism

Mixed Economies

Economies that embody elements of both planned and market-based economic systems -Most economies of the world are shifting towards the market side of the spectrum

Structural Unemployment

Encompasses people who don't have jobs because the economy no longer needs their skills. usually longer term.

The right to free choice

Feeds competition, resulting in better quality at lower prices -Canadian government trade policies boost freedom of choice, by encouraging both domestic and foreign producers to compete for our dollars

Fiscal Policy

Government efforts to influence the economy through taxation and spending decisions -Designed to encourage growth, boost employment and curb inflation -Done well, taxation and spending can boost the economy with the right balance between the two

The right to own a business and keep after-tax profits

If profit is earned, business owners get to keep after-tax profits -The lower the tax rate, the higher the motivation

Monopoly

Just a single producer completely dominating the industry, leaving no room for any significant competitors -Without competition there isn't any incentive to hold down prices or increase quality and choices. Not good for anyone except the company with the control. -Most countries have enacted pro-competitive legislation (i.e. Canada's competition act)

Cyclical unemployment

Layoffs during recessions

Monopolistic competition

Many competitors selling differentiated products -Producers have some control over price of their wares depending on the value that they offer their customers -New producers can fairly easy enter -e.x. clothing industry and the restaurant business

Pure Competition

Many competitors selling virtually the same product. -Consumers can't or won't distinguish one product from another, so no single producer has any control over the price -New producers can easily enter and leave purely competitive markets -Virtually disappeared in Canada, agriculture being the closest, but not quite

Oligopoly

Only a handful of competitors selling products that are either similar or different -Typically avoid intense price competition, because they have nothing to gain-every competitor would simply make less money -Breaking into the market can be tough because it typically requires a huge upfront investment -e.x. retail gasoline businesses, car manufacturing industry and the computer business

Budget Surplus

Overage that occurs when revenue is higher than expenses over a given time

Frictional unemployment

Short term unemployment, usually positive, reflects individual freedom to change jobs

Budget Deficit

Shortfall that occurs when expenses are higher than revenue over a given period of time

Reserve requirement changes

The bank of Canada also manages money supply by managing cash reserves -As reserve requirments increase, banks hold more funds, meaning they will have fewer funds available for making loans (decreased spending) -As reserve requirements decrease, some of the funds that that banks were holding became available for loans (increased spending)

Productivity

The basic relationship between the production of goods and services (output) and the resources needed to produce them (input) -calculated via the following equations: output/input=productivity -The goal is to produce more goods and services, using fewer hours and other inputs -productivity doesn't measure quality

Copyrights and patents

The government grants patents and copyrights, which create artificial monopoly situations, temporarily, in order to encourage innovation.

Demand Curve

The graphed relationship between price and quantity from a consumer demand standpoint -usually, slopes down as quantity demanded tends to drop as prices rise

Supply Curve

The graphed relationship between price and quantity from a supplier standpoint -Usually, as the price rises, the quantity produces rises correspondingly -curves upward to the right

Bank Rate

The interest rate the Bank of Canada charges on its loans to commercial banks -A reduced discount rate results in lower interest rates and increased spending. (stimulates economy during reccession) -An increased discount rate results in higher interest rates, which decreases business and individual spending (Reduces inflation)

Unemployment Rate

The percentage of people in the labour force of employment age who do not have jobs and are actively seeking employment -key element of economic health

Business Cycle

The periodic contraction and expansion that occurs over time in virtually every economy -Unpredictable

Equilibrium Point

The point at which supply curve and the demand curve intersect

Equilibrium Price

The price associated with the point at which the quantity demanded of a product equals the quantity supplied

Privatization

The process of converting government-owned businesses to private ownership

Equilibrium Quantity

The quantity associated with equilibrium price

Demand

The quantity of products that consumers are willing too buy at different market prices -Consumers tend to buy more of products with lower prices and less of products with higher prices

Supply

The quantity of products that producers are willing to offer for sale at different market prices -Businesses are likely to produce more of a product that commands a higher market price and less of a product that commands a lower price

Macroeconomics

The study of a countries overall economic issues, such as the employment rate, GDP and taxation policies

Microeconomics

The study of smaller economic units such as individual consumers, families and individual businesses

Economics

The study of the choices that people, companies and the government makes in allocating society's resources

Federal Debt

The sum of all the money that the federal government has borrowed over the years and has not yet been repaid

Money Supply

The total amount of money within the overall economy -two common definitions: M1 and M2 -Most often refers to M2 -Credit cards are not part of the money supply

Gross Domestic Product GDP

The total value of all final goods and services produced within a nations physical boundaries over a given period of time -A vital measure of economic health -Does not include illegal activities or legal goods not reported to avoid taxation, plus output produced within households

Open Market Operations: Controlling Inflation

When inflation is a concern, central banks sell securities. The buyers write cheques to the Bank of Canada to pay for the securities they bought and the Bank of Canada withdraws these funds from the banks. With fewer funds, banks must cut back on the loans they make, interest rates rise, credit becomes tighter and the money supply shrinks. This reduces spending and cools off the inflationary pressures.

Open Market Operations: Controlling Recession

When the economy is too sluggish, central banks purchase government securities from banks, putting money previously held back into circulation in the economy. As the banks have more money to lend, interest rates will fall, giving people more money to spend in the consumer-based economy.

Seasonal unemployment

job loss related to the time of year