Académique Documents
Professionnel Documents
Culture Documents
Economics
1. Banks Failed
2. Governments balanced their books
3. Protectionism
4. Deflation
World
Advanced Economies
Growth in World Output, IMF
Projections, through 2020
The G7 Economies, and China
Percentage Growth
GDP
Monetary
Base
11
Oil Prices: 1980 - 2015
12
We will consider these issues,
and more, in great detail
13
Economic Environment of Business
15
Important Questions
Should Canada maintain its zero inflation
policy? (or call it price stability)
Why did value of the Canadian dollar fall
significantly between 1970 and 2000, and
then rise to parity, and subsequently fall?
And fall since?
Canadian interest rates are now higher than
those in the US? Why? And does this
matter?
Should Canada adopt the US dollar? 16
Importance of Modeling
In order to answer these questions (and
many more), we need to develop a model of
the economy
The IS-LM-BP model allows us to analyze
the impact of alternative policies on several
aspects of the Canadian economy
17
The Macroeconomic Environment:
20
Some things to note.
Nominal GDP
Real GDP
23
Economic Environment of Business
GDP (Gross Domestic Product): Measures the production of all goods and services in
Canada over a period of time. This includes the production (value added) with both
Canadian and foreign owned factors of production. GDP depends on location, not
ownership.
GNP (Gross National Product): Measures the production of goods and services
produced with Canadian owned factors of production. This does not include production
(value added) in Canada with foreign owned factors of production but does include
production by Canadian firms abroad. GNP depends on ownership, not location.
= GNP
24
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
A 2 Country World
Canadian USA
GNP = 80 + 5 GNP = 95 + 20
GDP = 80 + 20 GDP = 95 + 5
25
Professor Walid Hejazi University of Toronto, Canada
Portfolio Investment versus Direct Investment
Cut - off points for foreign ownership of stock in classifying FDI
flows in OECD countries.
% foreign % foreign
ownership ownership
Australia 25 Italy N/S
Austria 5 Japan 25
Belgium 10 Netherlands N/S
Canada 10 Norway 10
Denmark 10 Portugal 11
Finland 20 Spain 50
France 20 Sweden 10
FRG 25 Turkey N/S
Greece N/S UK 20
Ireland N/S USA 10
Source: OECD (1987b) and Dunning and Cantwell (1987). More recent
publications by the UN and OECD show virtually the same figures.
1,800,000,000,000
1,600,000,000,000
1,400,000,000,000
1,200,000,000,000
1,000,000,000,000
Nominal GNP
800,000,000,000
Nominal GDP
600,000,000,000
400,000,000,000
200,000,000,000
0
1992-09
2001-09
1961-03
1962-09
1964-03
1965-09
1967-03
1968-09
1970-03
1971-09
1973-03
1974-09
1976-03
1977-09
1979-03
1980-09
1982-03
1983-09
1985-03
1986-09
1988-03
1989-09
1991-03
1994-03
1995-09
1997-03
1998-09
2000-03
2003-03
2004-09
2006-03
2007-09
2009-03
28
Professor Walid Hejazi University of Toronto, Canada
0.94
0.95
0.96
0.97
0.98
0.99
1.01
0.93
1
1961-03
1962-03
1963-03
1964-03
1965-03
1966-03
1967-03
1968-03
1969-03
1970-03
1971-03
1972-03
1973-03
1974-03
1975-03
1976-03
1977-03
1978-03
1979-03
1980-03
1981-03
1982-03
1983-03
1984-03
1985-03
1986-03
1987-03
GNP/GDP
1988-03
1989-03
What does this mean?
1990-03
1991-03
1992-03
1993-03
1994-03
1995-03
1996-03
1997-03
1998-03
1999-03
2000-03
2001-03
2002-03
2003-03
2004-03
2005-03
2006-03
2007-03
2008-03
2009-03
29
Canadian outward investment also improves
our living standards.
*Annual income from interest, dividends and reinvested earnings on Canadian direct investment
abroad. Millions of Canadian Dollars 30
Receipts are Now Greater than Payments
31
Canadas Openness to
International Trade and FDI
Canadas Exports, Imports, & GDP
Canadian Dollars
33
Canadas Trade, relative to GDP
Percent, relative to GDP
34
Percent of Canadas total exports
36
The Exchange Rate
E = US / CAN = the number of US dollars one obtains per Canadian
If E increases, Canadian dollar appreciates.
If E decreases, Canadian dollar depreciates.
Any transaction between Canada and the rest of the world involves the exchange rate.
Abroad
Canadian companies operating abroad
Portfolio Investment versus Direct Investment
Cut - off points for foreign ownership of stock in classifying FDI
flows in OECD countries.
% foreign % foreign
ownership ownership
Australia 25 Italy N/S
Austria 5 Japan 25
Belgium 10 Netherlands N/S
Canada 10 Norway 10
Denmark 10 Portugal 11
Finland 20 Spain 50
France 20 Sweden 10
FRG 25 Turkey N/S
Greece N/S UK 20
Ireland N/S USA 10
Source: OECD (1987b) and Dunning and Cantwell (1987). More recent
publications by the UN and OECD show virtually the same figures.
70%
60%
50%
World
40% Dev Econ
NAFTA
30% G20
United States
Canada + US
20%
10%
0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
42
Distribution of FDI within the G7
(Shares of FDI within the G7)
43
Distribution of Developed World FDI
(Shares of FDI within the Developed World)
44
Foreign Ownership of the Canadian economy
Percent of Total
7
Are these Changes Good?
High Outward
Depends on whether the outward is
Moving abroad because of a poor competitive environment
domestically
Moving abroad reflecting the competitive advantage because of
domestic firms
High Inward
Inward FDI brings with it many benefits, in terms of technology,
new management techniques, high paying jobs, exports, increased
competition
There are some reservations about the economic and social impact
of MNEs however all countries are trying to attract such firms,
subject to some conditions
Sector GDP* (millions of chained 2002 dollars) CAGR** % Change
2001 2010
2001 2010 shares shares 2001-2010 2009-2010
Agriculture, Forestry, Fishing and
Hunting
Mining and Oil and Gas Extraction
Utilities
24,674
51,236
27,384
`
26,357
53,930
29,845
2%
5%
3%
2%
4%
2%
0.70%
0.50%
0.90%
0.30%
4.80%
-0.20%
Construction 55,542 73,856 5% 6% 2.90% 6.60%
Manufacturing 181,084 159,740 17% 13% -1.20% 5.70%
Goods Producing Industries 339,779 347,710 33% 28% 0.30% 4.90%
47
http://www.ic.gc.ca/eic/site/cis-sic.nsf/eng/h_00013.html#vla2b
Canada Fiscal and Debt
http://www.fin.gc.ca/afr-
rfa/2013/report-rapport-eng.asp
48
G7 Government Net Debt, Relative to GDP, 2012
49
Government Budget Balance, Relative to GDP
50
Government Debt, Billions of Dollars and Relative to GDP
51
Government Debt Charges, percent of Total Revenues
52
Government Net Debt Ratio, relative to GDP
53
Government Revenue, Relative to GDP
54
Composition of Government Revenue
55
Composition of Government Revenue, 1966 - 2013
56
Should Canada pay off the debt?
What is the optimal debt to GDP ratio?
It is some positive number (say 5%), but not 70%
In 1992, the deficit was $43 billion (that is, the addition
to the debt in one year)
Debt to GDP ratio in 1992 was about 70%
If deficit disappears, growth in debt stops
As GDP rises, debt to GDP ratio falls
Assume that GDP growth averages 4%
Growth in the debt is zero
How long would it take for debt to GDP ratio to
reach its optimal of say 5%? Answer???
Highlights importance of debt repayment
Significant progress has been made in this respect
Savings and Investment
58
Economic Environment of Business
Question: Suppose a car is imported from Japan: how does this affect GDP?
Later, we ask how such a transaction would affect the Balance of Payments.
59
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
Notation
Y = GDP
J = net investment received from foreigners
= investment income received - investment income paid
F = transfers from government to the private sector
N = interest paid on government debt
T = taxes
G = government spending
C = consumption
X = net exports = exports - imports
60
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
S = Sp + Sg + Sr
= Y + J + (F + N - T) - C + (T - F - N) - G + - (X + J)
=Y-C-G-X
The National Income Identity: Y = C + I + G + X
This implies therefore that S=I(Savings = Investment)
61
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
In the absence of global capital markets, the only way to finance domestic investment is
have domestic savings.
Similarly, the US has record capital inflows to finance investment in the US: the productive
investment opportunities in the US are being exploited (financed) by both US and global
investors
Who benefits from records on US markets?
Of course, global capital flows come at some risk: herding behaviour that led to the East
Asian Financial Crisis
62
Professor Walid Hejazi University of Toronto, Canada
The Labour Market:
Unemployment
In order to be classified as unemployed in Canada, an individual of working age (16 years
and older) must be:
The Labour force is defined as the number of people who are either employed or
unemployed:
Unemployment rate = (Number of people unemployed) / (Labour force)
The labour force participation rate is the percentage of the adult population that is in the
labour force:
Labour force participation rate = (Labour force) / (working age population)
Discouraged workers are people who drop out of the labour force.
Question: why doesnt Flaherty, Canadas Finance Minister, simply earmark $5 billion for
job creation? Wouldnt this reduce the unemployment rate? 64
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
The natural rate of unemployment that would obtain in normal times. It reflects:
Labour mobility
Changing jobs/industries
Leaving and re-entering the labour force
Immigration
65
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
Employed
Not in Labour Force
Unemployed
Unemployment Rate = U / LF
Data for Canada (December 2012)
1982 Recession
1992 Recession
2008 Period
70
US Unemployment Rate
1982 Recession 2008 Period
1992 Recession
US Labour Force Participation Rate
72
Differences in Definition of
Unemployment
Differences in the way unemployment is measured account
for about 0.8 to 0.9 percentage points of the unemployment
rate gap
Canada
US
Why is the unemployment rate higher in
Canada than in the U.S.?
Measurement issues:
More likely to be classified as NLF in U.S.
Sociological issues:
Canadians are more likely to say they are U
Incarceration rate is much higher in the U.S.
Why is the unemployment rate higher in
Canada than in the U.S.?
Unionization rate higher in Canada:
30% versus 10%
EI rules
More likely to receive benefit in Canada; for longer
Regional differentiation in eligibility
Whats been happening to
Labour force participation?
79
Labour force and participation rates
2008 2009 2010 2011 2012
25 to 44 years 87.2 86.9 86.8 86.7 87.1
Males 92.4 91.4 91.3 91.3 92
Females 82.1 82.3 82.3 82.1 82.2
45 years and older 54.3 54.5 54.8 54.7 54.6
Males 60.5 60.5 60.7 60.5 60.1
Females 48.5 48.9 49.3 49.3 49.4
65 years and older 10.1 10.5 11.4 11.9 12.6
Males 14.2 15.1 16.2 16.5 17.1
Females 6.8 6.7 7.5 8.1 8.8
Source: Statistics Canada, CANSIM, table 282-0002.
Last modified: 2013-01-04.
80
Labour force participation rates, men
and women aged 25 to 64, 1976 to 2009
http://www.statcan.gc.ca/pub/81-004-x/2010001/article/11151-eng.htm
Economic Environment of Business
Questions
If 1 million jobs are created, what is the highest and lowest possible unemployment rates
that can result?
82
Professor Walid Hejazi University of Toronto, Canada
Inflation
83
Inflation
CPI inflation
A measure of price movements, produced by Statistics Canada and obtained
by comparing the retail prices of a representative "shopping basket" of goods
and services at two different points in time.
Core inflation
Year-over-year growth in a variant of the CPI that excludes the eight most
volatile components which account for 19 per cent of the CPI basket
(fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity
transportation, and tobacco products) as well as the effect of changes in
indirect taxes on the remaining components.
84
85
86
Economic Environment of Business
Suppose that average incomes in Canada over the past year increased by 3%, but prices
increased by...
a) 1%, then real incomes grew by 2%
Yt = 100, Pt = 1
Yt+1 = 103, Pt+1 = 1.01
The number of dollars you earn (the nominal income) increased by... 3%
The number of goods you earn (the real income) increased by...
(103)/(1.01) = 101.98 = 102, or 2%
87
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
Question: Would agents in the economy sign contracts that resulted in real wage
reductions? ==> costs of unanticipated inflation
We obviously care about measuring the real growth in our economy, and hence need to
calculate the inflation rate.
Question: If measured inflation is 3%, then what is true inflation. For example, the Bank of
Canada has a zero inflation policy in effect. Their inflation rate is 1 to 3%. Why?
88
Professor Walid Hejazi University of Toronto, Canada
Full Employment
Y* & UR*
89
Economic Environment of Business
Some Definitions:
Y* is the potential of the economy: The amount the economy would produce if all labour
and capital are utilized optimally.
90
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
Okuns Law
For each percentage point that UR rises above UR*, Y falls below Y* by 2%.
91
Professor Walid Hejazi University of Toronto, Canada
The Balance of Payments
92
Economic Environment of Business
Exports
Imports
Demand Supply
Demand Supply
Capital Capital
Inflows Outflows
Forces of Supply and Demand interact to determine the equilibrium exchange rate
93
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
Current Account = X + J
Capital Account
1. Capital Inflows - Capital Outflows
2. International borrowing - International lending
3. The Capital Account increases when Canadians sell more assets (claims) to foreigners
than Canadians buy from foreigners
95
Professor Walid Hejazi University of Toronto, Canada
96
20.000
40.000
60.000
80.000
100.000
120.000
140.000
160.000
0.000
01/01/1970
01/01/1972
01/01/1974
01/01/1976
01/01/1978
01/01/1980
01/01/1982
Increase in
Significant
01/01/1984
01/01/1986
01/01/1990
01/01/1992
01/01/1994
01/01/1996
Oil Prices: Price per barrerl, US dollars
01/01/1998
01/01/2000
01/01/2002
01/01/2004
01/01/2006
01/01/2008
1
0.5
0.6
0.7
0.8
0.9
1.1
1970M01
1971M08
1973M03
1974M10
1976M05
1977M12
1979M07
Spot Oil Price (WTI)
1981M02
1982M09
1985M11
1987M06
1989M01
1990M08
1992M03
1993M10
1995M05
Canada heavily dependent on Oil
1996M12
1998M07
Value of Canadian Dollar
2000M02
2001M09
US dollars, per Canadian
2003M04
2004M11
2006M06
2008M01
20.00
40.00
60.00
80.00
0.00
100.00
120.00
140.00
160.00
2000-01-01
2000-11-01
2001-09-01
2002-07-01
2003-05-01
2004-03-01
2005-01-01
2005-11-01
2006-09-01
2007-07-01
Correlation: 0.93
2008-05-01
2009-03-01
OIL PRICES
2010-01-01
2010-11-01
2011-09-01
2012-07-01
2013-05-01
2014-03-01
2015-01-01
2015-11-01
0.2
0.4
0.6
0.8
1.2
0
1
2000-01
2000-09
2001-05
2002-01
2002-09
2003-05
2004-01
2004-09
2005-05
2006-01
Petro Currency?
2006-09
2007-05
2008-01
2008-09
2009-05
2010-01
2010-09
2011-05
2012-01
2012-09
Canada US Exchange Rate
2013-05
2014-01
2014-09
2015-05
98
Saudi Arabia 18%
Venezuela 14%
Canada 12%
Iran 9%
Iraq 8%
Kuwait 7%
United Arab 7%
Russia 4%
Libya 3% The Worlds proven
Nigeria 3% oil reserves
Kazakhstan 2%
Qatar 2%
United States 1%
China 1%
Brazil 1%
Algeria 1%
Mexico 1%
0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 0.2
Economic Environment of Business
The Balance of Payments summarizes a countrys transactions with the rest of the world
The Balance of Payments summarizes the supply and demand forces for the Canadian dollar
Question: why has the value of the Canadian dollar fallen over the past 30 years from par
with the US dollar to less than 70 cents?
Question: Is a depreciating dollar good for Canadians? Exports increase and imports fall,
thus increasing GDP and employment.
100
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
1. AD = Y = C + I + G + X
one of C, I or G increases
imports increase, and X falls (X = exports - imports)
101
Professor Walid Hejazi University of Toronto, Canada
Economic Environment of Business
b) if paid for using a bank account at CIBC, then next period Canadians pay interest to
foreigners J falls, and either
i ) Capital Account up
ii) FX falls
102
Professor Walid Hejazi University of Toronto, Canada