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RSM100Y1 Lecture Notes - Canadian Dollar

Rotman Commerce
Course Code
Michael Szlachta

of 12
RSM Part 2
Examining the Present (Tracking current Business Cycle in US and Canada)
Tracking the Current Cycle
Introduce stabilization macro of ECO100 (how applies to current business cycle)
What to watch out for and tools of analysis for short term macroeconomic
Examine statements about how current cycle developed Boxes to understand
eloements behind statement
Statement 1 (The Recession)
Late 2007
at least mid 2009, economy has undergone a slowdown in growth of
GDP that then developed into serious recession
Trend growth is usually positive, even positive, but below trend rate of growth
counts as a SLOWDOWN. Generally, growth below trend unemployment
eventually rises
RECESSION period (2+ consecutive quarters) where GDP declines (negative
81-82 and 90-91 downturns severity about same size, not larger
Unemployment effect lags behind GDP effect
Statement 2 (Sources of Recession)
Several sources to slowdown and recession: Began with 1 key component of US GDP
(namely residential construction). In Canada, initial impacts were net exports then
Details of GDP (Demand):
oConsumption largest
oGovernment Salaries + g/s, not transfers
oInvestment Residential, Non-Residential Structures, Machinery &
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oExports 2nd largest for Ca
oImports MINUS
oChange in Inventories flows into or out of inventory stock (can be ve)
Y (GDP) = C + I + G + X M + Invtry
o= Consumption + Investment (includes housing) + Gov current spending +
Exports Imports + Change in Inventories
US initially chief weakness in GDP was in Residential Investment and in
US net exports generally been +ve for GDP.
Ca net exports been chief negative
Ca Residential investment weak lately but not reduced GDP seriously
Ca Inventories also started to become big negatives
PAY ATTENTION TO DETAILS OF GDP! Source of slowdown (or boom) can give
clues to how long may continue; also important for individual industries or sectors of
the economy
Statement 3 (US Slowdown Housing)
Beginning of US economy was in REAL economy, not financial area (was centered in
residential investment sector + was a standard and partly predictable `stock
adjustment effect due to previous over building. Inventories and automobiles also
showed standard `stock-adjustment` behaviour
Flows G & S purchased and used up very soon after
oCalled non-durables (also services)
oRepeat expenditures (tastes may change) e.g. burgers, gas, movies
Stock Some G and few S are `durables` (keeps adding)
oConsumer durables (autos, TVs, DVDs, etc)
oResidential Investment (+ renovations)
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oBusiness Investments: Plant, equipment, telecommunications
Eventually stocks wear out, or become obsolescent (not modern enough)
Depreciation rates vary widely among types of goods: houses slow, computers and
software fast
Stock adjustments
oFlows build up stock (less depreciation)
oHigher stock desired new flows (purchases) increase sharply
oOnce stock at desired size flows (new purchases) drop off rapidly
Durable goods are thus subject to wide swings in demand and are dependent on size
of existing stock
Macro (+marketers) need to pay attention to stocks and stock adjustment
95 00, US boom in IT investment (Y2K, rise of internet). 00 01 stock too large
(over-investment), especially as economy was slowing Huge drop in business
investment (especially in IT) Ripple effect then downturns Laid off workers,
lower profit payouts, reduced demand for other consumer goods further lowering
demand and sales
04 Housing boom in US
oLow interest rates
oVery low downpayments (or 0)
oBig increase in sub-prime lending those normally excluded from mortgages
were offered introductory very low interest rates (poorly regulated market)
Demand for housing increased house prices market bubble scramble to get
capitalist gains
06 rise in interest rates. Homeowners found could not afford payments financial
institutions foreclosed took back house and put up for sale housing prices began
to drop bursting housing price bubble
Stock of housing too large relative to population who wanted and could afford
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