Lecture Notes: Chapter 2
¾ Purpose of Economic System
o Create an environment where entrepreneurs can get hold of labour, capital and
resources. Therefore, they can make things that people want.
o Profits are created for owners and operators for the businesses
o How do we do know that an Economic System is doing the job that it should...?
¾ Is the Economy producing things people want?
o GDP(Gross Domestic Product)
Gross = large, aggregate
Product = things that people make
x Fantasy way of saying the total/value of all the things produced in
Canada in one year
x Canada is in the top dozen in Largest Economic System, we are a
o GDP Growth
Is the economic system growing?
GDP growing = more people making more stuff
GDP falling = fewer people buying less stuff
The Chinese and Indians were doing things really, really well a few years
ago since their GDP increase was 10% and 7% respectively
The importance of GDP growth is for economic system growth.
The amount of man-hours and man-days it takes to produce stuff.
Ratio of inputs to outputs
How much of the input is required to produce some output
Why are the Americans more productive than the Canadians?
x More advanced technology
x American businesses spend a lot more in capital; they invest more
in fancy machines than we do.
x Higher competition/More competitionÆ because there is more
people, there are more businesses
x Lower Taxes in the U.S
x International Relations
that because of the winter
x We are more inheritably conservative; entrepreneurs in other
countries are less attracted to investing in Canada.
x Quality of WorkersÆ the brightest and the best, the most
productive people are heading to USA. It was a huge concern 15
years ago. But LW¶V slowing down a little bit.
Canada is in the top 20 in the richest/poorest countries on Earth(not recent
Prices that go up. For example shoes cost 10 dollars one year, the next
year it costs 12 dollars. The exact same pair of shoes, the same product.
When the price goes up, people buy less.
People with fixed incomes are hurt by inflation since it forbids them to
x Retired people have fixed income, no raise, and same amount of
money for rest of UHWLUHPHQW&DQ¶WEX\DVPXFKVWXII
You are paying more for the same product.
Measure of inflation : use CPI( Consumer Price Index)
x Statistics Canada assumes what Canadians own/buy
o We have a 4 bedroom house, we go to grocery store once a
week, we buy certain stuff, we buy 40 L of gas a week, we
rent a movie once a week, we pay 40 dollars for phone
servicesÆ basket of goods(what consumers typically
buy)Æ figure out costs what the price of all the costs
within the basket of goods is
o CPI Æ increased by 2.3%.
Ex. What costs you 100 dollars one year; it will go
up to 102.3 dollars the next year.
o Government of Canada watches the inflation, they measure
o Since prices only went up by 2.3%, &DQDGDGLGQ¶WSXWLQ
any policies since they are content that we can live with
this slight inflation.
o Canadian government said that anything less than 3% we
can live with
x A couple years agoÆ Canada is in top 5 for Consumer Price
o The inflation rate in Zimbabwe is over a million % per year
Money is worthless, a loaf of bread will cost you
hundreds of thousands of dollars
o In Japan, there is deflationÆ the prices are going down
from one year to the next
People stop making purchases when the things they
want to buy go down in priceÆ LW¶V a butterfly
effect and it ruins the economic system because
people become unemployed.
x EXAMPLE: people stop buying houses,
than real estate agents become unemployed,
plumbers lose jobs, than they stop going to
restaurants and buying stuff and then
restaurants and etc lose money... etc. Etc
Labour is underutilized
When you have bright and intelligent people and you cannot find them
work, then your economy is not working.
Purpose of economic system: create an environment where entrepreneurs can get hold of labour, capital and resources. Is the economy producing things people want: gdp(gross domestic product) N fantasy way of saying the total/value of all the things produced in. N canada is in the top dozen in largest economic system, we are a player: gdp growth. S gdp growing = more people making more stuff. S gdp falling = fewer people buying less stuff. S the chinese and indians were doing things really, really well a few years ago since their gdp increase was 10% and 7% respectively. S the importance of gdp growth is for economic system growth: productivity. S the amount of man-hours and man-days it takes to produce stuff. S how much of the input is required to produce some output. N american businesses spend a lot more in capital; they invest more in fancy machines than we do. www. notesolution. com.