EC250 Lecture Notes - Lecture 1: World Economic Forum, Inventory Investment, Fixed Investment
Document Summary
Lower consumption, big drop in demand for things bought on credit (cars, large ticket items, big decline in investment, typical in recessions, main reasons: lower demand, uncertainty about future, business fixed investment - falls as firms postpone projects. Inventory investment falls since demand is lower and forms reduce operational costs: residential (investment) construction falls as people stop buying new homes. Channels of transmission in the great recession: through financial markets, the most important channel, mortgage-based securities - sold around the world, derivative exposure - unknown and so creditworthiness of financial institutions - suspect, high leverage in european institutions. The crisis in canada: before the great recession, the canadian economy was in good shape, low unemployment, fast growth, government budget surpluses, both federal and provincial, high resource prices. Investment fell as firms took a "wait and see" approach and delayed projects: consumption and investment fall.
