Csc- Chpt 4

Front 1

Three main groups of the economy

Back 1

1. Consumers- max satisfaction with limited resources
2. Firms- max profit by selling g/s
3. Governments- spend money eduction, health, employee training and military, oversee regs, projects

Front 2

economic growth

Back 2

economy's ability to produce greater levels of output over time and is expressed as the percentage change in a nations GDP over a giver period

Front 3

GDP

Back 3

market value of all final goods and services produced within a country in a given time period (usually quarter or year)
** FINAL GOODS- purchased by the end user

Front 4

The expenditure Approach

Back 4

Total Spending on g/s
= C + I + G + (X-M)
personal consumption, investment, government spending, net Exports

Front 5

income approach

Back 5

total income earned by producing those g/s
income that firms pay for..
wages, rent for land, interest for capital goods, profits for entrepreneurs,

Front 6

nominal vs real GDP

Back 6

nominal= dollar value of all g/s produced ina given year at prices that prevailed in that year
Real GDP= " prices that prevailed in a base year
- tells us amount the change in out put produced
- difference b/t the two is based entirely on price

Front 7

What causes GDP to grow?

Back 7

1. increase in population= growing work force
2. increases in capital stock (productivity) and individual productivity
3. improvements in technology- substituting capital for labour (ATM and tellers)

Front 8

determinants of economic growth

Back 8

increase in output/productivity per worker comes from the technology and capital per worker therefore we need liquidity to support this investment
1) capital alone cannot sustain growth- it leads to smaller and smaller gains in output so higher savings does not mean higher growth over time
2) sustained growth requires technological progress which means reserach

Front 9

phases of the business cycle- growth

Back 9

expansion- inflation is stable, adjusted inventory to meet higher demand and investing in new capacity, profits increasing, business start ups out number bankruptcies, job creation is steady, RGDP rising

Front 10

phases of the business cycle- peak

Back 10

- demand outstrips capacity
- labour and product shortages
- interest rates rise and bond prices fall
- sales decline causing an accumulation of inventory
- stock prices fall

Front 11

phases of the business cycle- contraction

Back 11

- R GDP declines
- unwanted inventories and declining profits
- more failures then start ups
- falling employment erodes house hold income
- consumer spend less and save mroe

Front 12

phases of the business cycle-trough

Back 12

- interest rates fall triggering a bond rally
- inflation falls
- purchasers who postponed spending now spend on lower prices
- stock prices rally

Front 13

phases of the business cycle- recovery

Back 13

- firms who reduced inventory must re stock
- still cautious of hiring back workers
- not ready to make new investment
- inflation may decline further, unemployment is still higher, wages are restrained
** expansion starts when an economy rises above its previous peak

Front 14

economic indicators

Back 14

leading (anticipate)- housing starts, commodity prices, changes in employment through hours worked, stock prices, money supply, manufacturers new orders
coincident (current state)- personal income, GDP, industrial production, retail sales
Lagging (confirm patterns)- unemployment, private sectors p*e spending, bus loans, labour costs, inflation

Front 15

statistics canada recession

soft landings

Back 15

measured by the dept, duration and diffusion
- sustained debt, duration more then a couple months, whole economy

soft landings- economic growth slows sharply by does not turn negative "holy grail" of policy makers

Front 16

labour maker indicators

Back 16

participation rate- share of the working age pop that is in the labour force (labour(E+UE) /working age) --> shows the willingness of people to enter the workforce and take jobs
unemployment rate- represents the share of the labour force that is unemployed by actively looking for work.
--> this number can rise bc employment falls, or more people enter the work force

Front 17

types of unemployment

Back 17

cyclical unemployment- tied to business cycle, rises when the economy weakens (recession) and falls during growth
frictional unemployment- normal labour turnover, finished school m quit, fired, part of a healthy economy
structural unemployment- lack skills, live in the wrong area, do not want to work for the wage rate offered - tied to technology, international comp, government policy, lasts longer then frictional because workers must restrain or relocate for a job

Front 18

natural and actual unemployemt

Back 18

- when actual > natural, excess supply of workers= weakens labor bargaining power, inflation in check because no wage gains
actual < natural, shortage = bargaining power, wage gains, inflation

Front 19

What factors influence interest rates?

Back 19

1. Demand and supply of capital- government decific and boom in business raises the demand for money (capital) and TF the price of capital, interest rates, goes up
2. Default Risk: if the government is at rsk of defaulting on its risk, the rates rise for everyone, this adiitonal risk is called default premium
3. foreign i and exchange rates-
4. central bank credibility- they can raise and lower ST rates to keep inflation low and stable
5. inflation- interest rates are raised by lenders to compensate for the additional inflation

Front 20

How do interest rates impact the economy?

Back 20

1. raise the cost of capital for business investments.. invetments should earn a greater return then the cost of funds used to make them. higher rates make profit harder
2. higher rates discourage spending and encourages saving
3. increasing the portion of income needed to service debt, this reduces income available for other items (however savers earn more)
** high rates has a negative effect on rates

Front 21

CPI

Back 21

consumer price index
600goods
average price paid for this basket

Front 22

costs of inflation

Back 22

1. erodes standard of living for those with fixed income, rewards those who have bargaining pwr and can increase wages of change investment strategy
2. reduces real value of investments bc money is worth less.. lenders also demand a higher rate
3. distorts signal prices
4. brings rising interest rates and a recession

Front 23

output gap

Back 23

difference between real and potential GDP (what the economy is capable of producing when its existing inputs of labor, capital and tech are fully employed at their normal levels of us (aka with out inflation rising)
negative gap- actual < potential= spare capacity in the economy - inflation will or remain steady bc unused labor and capacity can be called in
positive output gap- above capacity, upward inflation pressure (expansion towards peak)

Front 24

demand pull and cost push inflation

Back 24

demand: higher and continued consumer demand pushes inflation higher
cost: supply side becomes more costly pushes pries up

Front 25

phillips currve

Back 25

unemployment is low- inflation is higher
unemployment is high- inflation is low

Front 26

sacrifice ratio

Back 26

gauge the cost of disinflation, the extent to which GDP must be reduced wit increase unemployment to achieve a 1% decrease in the inflation rate

Front 27

balance of payments

Back 27

bop- detailed statement of a country's economic transactions with the rest of the worldd for a given period of time
1) Current accounts: exchanges of goods and services b/t Canada and foreigners
2) Capital and financial accounts: financial flows b/t Canada and foreigners related to investments by foreigners in canada and vice versa

* if we purchase more abroad then we do here, we run a current deficit. TF we need to fund this by selling more assets and running a capital ad financial account surplus

Front 28

merchandise trade

Back 28

if canada's dollar drops, exports will increase because it is cheaper, but imports will decrease bc it is more costly to buy foreign goods. the benefits are lost however if the price of canadian goods rise to reflect the lower dollar/demand

Front 29

determinants of exchange rates

Back 29

- inflation differentials
- interest rate diffs
- current account
- economic performance
-public debts and deficits
- political stability

Front 30

types of exchange rates

Back 30

fixed: central bank maintains the domestic currency at a fixed level against another country
floating rate: market forces to determine value of currency - central bank may intervene if it thinks movements are excessive