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BU111 (655)

Chapter 5 - Economic Factors

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Sofy Carayannopoulos

Keith DiazChapter 5Economic Factors Canadian financial systemInvestment instrumentsIf you understand it from the investors perspective you understand corporations perspectiveTime value of moneyThe dollar today is not the same value as the dollar tomorrow Effect of trade balance on domestic economyBalance of trade means imports vs exportscan be a surplus or deficit Importsexports means trade deficitbad because money is leaving the country as we are paying companies that sell their product in our country from abroadBalance of payments difference between money flowing in and out of the country as a result of trade and other transactionsEffect of exchange rates on competitive advantageWhen the exchange rate value of currency goes up it increases your buying powerMore imports less exports when high exchange ratebad for exporter less competitiveEffect of GDP on standard of livingGDP can sometimes overstate the true valueinaccuraciesGrowth can be good but we must consider who it is impactingwe want GDP for allCanadian financial systemFinancial institutions facilitate the flow of money from surpluses to deficits Lines between the 4 financial pillars have been blurred since 1980 due to deregulationchanges were made to the Bank Actmore competition and less regulation in CanadaChartered banks have been allowed to enter other businesses They have bought trust companies and have to a degree become investment dealers In Canada for a bank to operate the bank must have a charterTrust companies have declined in importanceMany trust companies have been bought by banks or insurance companiesCanada Trust largest trust company merged with TorontoDominion BankTD Canada Trust 1 Chartered Banksbusinesses such as TD world bank Bank of MontrealPrivately owned not government owned firm that serves individuals nonbusiness organizations and businesses as a financial intermediary Largest and most important institution You can buy stocks in these banks allow people to borrow and save money5 largest Canadian banks account for 90 of total bank assetsBank Act limits foreigncontrolled banks to less than 8 of total domestic bank assetsAct allows foreigncontrolled banks to increase competition but still limit the extent to which the foreign competitors to come in to prevent population investing money in foreign banksDetermines what banks can or cannot doMajor source of shortterm loans for business up to 5 yearsSecured loans when you go to the bank and take out the loan you give them the right to sell your personal belongings if you do not pay them backlower interest than unsecured Unsecured loans backed only by the borrowers promise to repay it Only the most creditworthy borrowers can get unsecured loansKeith Diaz Expand money supply through deposit expansion They do not make money but by taking deposits and making loans they expand money supply Reserve requirement banks must keep a portion of chequable deposits in vault cash You deposit into the bank The bank pays you interest The bank lends some of your money to someone else and charges them more interest The bank keeps the interest left overWhen the bank lends money to someone the person buys something from a business and the business depositsto the bankbank holds onto some and lends some of itcycle repeats The more money circulates the more people can buy etc Deposit Reserve by Bank Money to Lend Total Supply 100 10 90 190 90 9 81 271 81 81 729 3439 729 729 6561 40951 6561 656 5905 46856Changes in banking 1 Deregulation allowed banks to alter role as intermediaries between depositors and borrowers 2 Changes in consumer demands banks try to be responsive to demands to remain deregulated banks respond to new competition by selling a growing array of services in their branches 3 Competition from foreign banksBank of CanadaThe banks bank managed by the board of governors and is crucial in managing economyWhenever banks borrow money they go to the Bank of CanadaOpen market operations o if the Bank wants to increasesupply it can buy government securities The people who sell the bonds then deposit the proceeds in their banks which increase banks reserves and willingness to loan The Bank can also lower bank rate causing increased demand for loanso If the Bank wants to decrease money supply it can sell government securities People spend money to buy bonds and these withdrawals bring down banks reserves and reduce their willingness to loan The Bank can also raise bank rate causing decreased demand for loans Bankrediscount rate the Bank of Canada sets the interest rate This is the rate at which chartered banks can borrow from the Bank of Canada This influences how the other banks are going to charge us when we borrow or how much they are going to give us when we save2 Alternate banksTrust companies such as Canada Trust credit unionsThe difference between trust companies and chartered banks Trust companies are smaller versions of banks Before you could borrowdeposit money to them but they werent trustworthypopular because they did not offer the same range of services Now they do not really existCredit unions cooperative savings and lending associations formed by a group with common interests They lend to business and consumers When you do things with CUs youre a member of that union So when the union generates profits you get a dividendgrowing in appealA trust company safeguards property funds and estates entrusted to it It may also serve as trustee transfer agent and registrar for corporations and provide other services 3 Specialized lendingsaving intermediaries Life Insurance companies
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