Macro Chapter 8, 9 ,10, 11.docx

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Bridget O' Shaughnessy

Investment and Saving Investment Spending  The purchase of new capital goods Financial Institutions  Institutions within the economy that help match one person’s savings to another person’s investments o Savers give money to institutions hoping to get it returned on a later date with interest o Investors take money from institutions and know they have to pay it back with interest  Regulated by government institutions o Provincial Government regulates credit unions and caisses populaires Financial Markets  Direct link between borrowers and savers  Bond market o A certificate of indebtedness that specifies the obligation of the borrower to hold the bond and pay back on a later date (IOU)  Interest paid and the maturity date is identified  Buyer (creditor) can hold bond or sell to someone else  Sale of bond called Debt Finance from company perspective o Issued by large businesses, and government; savers are the households o Term; risk  Long term bonds are riskier than short term bonds but offer higher rates of interest  Perpetuity: Bonds that pay interest but have no maturity date o Risk depends on who is issuing them determines the risk  Probability of company to pay back the bond • Higher the credit risk of defaulting, the higher interest rate is demanded o The company carrying debt, recent changes in debt and revenues being earned determines the risk  The Federal Government is a relatively safe investment even though it has high debt, the size of it is smaller than its capacity to finance the debt  The provincial government is more risky due it’s lack of diverse economy and reliance on tax revenue (differs province to province)  Corporations tend to have higher rates of interests due to risk involved  Shaky corporations issue junk bonds which pay higher rates of interest compared to more secure corporations  Stock market o Part ownership of the company as well as a claim to the profits o Sale of stock is called equity finance o Get a dividend or capital gain (Bonds only get interest)  Also a capital loss  High rates of return over time than bonds because of more risk  Stock is traded in the stock market but no money is received to the corporation o Price of the stock is determined by supply and demand o If company does well, stock prices go up as demand goes up o Borrowers are firms, savers and households o Paid after bondholders are paid  A stock index is the average group of stock prices o Watched closely to give indicators about future economic conditions Financial Intermediaries: Indirect link between borrowers and savers  Banks o Provide loans and deposits to savers  Mutual fund o People get money together to buy stocks o Actively managed vs. Index  Actively managed is managed everyday by someone  Index is changed based on stock market (TSX)  Index is cheaper National Income Accounting Identity  Closed economy  Y=C+I+G Private Saving  Sp=Y-T-C o Y=income o C=consumption o T is taxes minus transfers Public Saving  Sg=T-G  T is bigger, running a surplus  G is bigger, running a deficit Definition of Savings  National Income Identity First o Y=C+I+G o Y-C-G=I  National Savings o S=Sp+Sg o S=Y-T-C+T-G o S=Y-C-G  Savings equal Investments in a closed economy Market for Loanable Funds  Funds we are saving which others are borrowing  Demand and Supply o Slope and shift  Demand o Negative Slope o Only borrowers are firms  Not true in real economy o Interest rate rises, borrowing more costly, investment spending by firms goes down  Supply o Positive slope o Households: Higher Interest Rate=every dollar saved now=more future consumption  Public Saving does not get affected by interest rate Shifts  How much firms want to invest will impact demand curve only (anything that affects investment) o Investment tax credit: Shifts to the right  When repealed shifts to the left  How much households are saving or government is saving will affect supply (Anything with public and private savings)  In equilibrium of closed economy S=I Example 1 Example 3 Note: A change in the way tax is collected; people will want to save more when they are taxed on consumption. Also note that private savings increased even as interest rate fell because private saving triggered this to happen. There would have been a surplus if the interest rate remained the same as S1 so lower interest rate so firms invest more. Example 3 Note: Government spending increased meaning that tax revenue remained the same but government spending increased, leading to the a decrease in government saving. That led to a decrease in national savings. Private savings went up because Interest rate rose, but since the decrease in government saving was higher than private saving, national savings still decreased. Unemployment Natural Rate of Unemployment  Refers to the amount of unemployment the country usually experience o Cyclical unemployment refers to the year to year fluctuations that occur around its natural rate of unemployment (the ups and downs of the economy caused in the short run that effect unemployment) Stats Canada  Collects data (mostly through phone surveys) to divide household adult population into three categories o Employed (if answered no by person being questioned move on to the next bullet) o Unemployed (Were you looking for work: If answer is no) o Not in labour force (Old enough to work but do not want to work)  Single parents  Drug dealers  University students *Note: Adult population mean 16 and older who are not institutionalized (long term care facilities), not in the military (no flexibility), and not in prison Formula  Stats Can defines the labour force as the sum of the employed and the unemployed o Labour force = Number of employed + Number of unemployed  Unemployment rate is the percentage of labour unemployed o Unemployment rate=#of unemployed/labour force x 100 o They can also do this for the entire population or narrow the rate into defined groups of age, gender, race, etc.  Labour-force participation rate measures the percentage of the total adult population of Canada o LFPR=labour force/adult population x 100 o This tells us how many people choose to participate in the labour market and is computed for entire or groups of populations  Employment=#of employed/adult population x 100 Practice  In 2009 16.85 million people were employed, 1.52 million people were unemployed, and the adult population was 27.31 million  Labour force = 16.85 (Employed) + 1.52 (Unemployed) = 18.37 million people in the labour force  Unemployment rate = 1.52 (unemployed) /18.37 (labour force) x 100 = 8.3 percent were unemployed  Labour force participation rate = 18.37 (labour force) /27.31 (total adult population) x 100 = 67.3% were participating in the labour market o Also you can easily find that 32.7% of people were not participating in the labour market Some General Trends  Women tend to have lower rates of labour force participation o This gap is closing though as more women enter the workforce  People aged between 15-24 have much higher unemployment rates than older people  In normal economic times both men and women in similar ages tend to have similar rates of unemployment o In the recent recession though, men unemployment rate rose more than the women unemployment rate  Atlantic Canada tends to have a higher unemployment rate compared to western Canada Reality of Figures from Unemployment Rate  Discouraged workers o Individuals who would like to work but gave up on searching o Chances of finding work is low so they don’t look for it, thus not being included in the labour force  But if you were to offer them a job spontaneously, they would take it, proving the problem of whether they truly are unemployed or outside the labour force  Underemployment o These workers are working less than they want to o They want more hours, but they can’t get more hours at work  May be lying to Stats Canada o Some do this to reap the benefits of unemployment insurance Unemployment Spells   Taking the an average for how long people are unemployed can clutter the true picture o Imagine someone being unemployed for a total of 12 weeks, someone who has been unemployed for 16 weeks and someone who has been unemployed for 1 week  The Average Unemployment spell is 9.6 weeks [(12+16+1)/3 people] o This average does not take into account the fact that the person who has been unemployed for a week is not that serious compared to the other two people who have been unemployed for a while Why is there always a natural unemployment rate?  In a pure free market economy, labour demand would equal the labour supply in equilibrium o But this is not possible because the wage offered at equilibrium could be really low, this would not accommodate costs associated with living  In our economy, approximately 6 to 8 percent is the natural unemployment rate in which occurs when the economy is stable o This can change as the economy changes resulting in cyclical unemployment Types of Unemployment  Frictional o Job search  Look for a great job, something that suits them o Sectoral shifts  Shifts in job market in which where people work become unemployed  Skills set for that certain industry but no other industries  Ex. Imagine working for an oil gas company in Canada, prices for gas falls and companies have to recover costs by cutting labour. At the same time, the auto sale industry grows because gas is cheaper and people are buying more cars, thus they want to hire more workers. The oil workers can’t just go work for the auto workers because they have a different set of skills, thus they remain unemployed because of the demand shift for labour in each industry.  Structural o Wage is higher than the equilibrium wage  Quantity labour supplied is greater than quantity labour demanded  This essential leads to firms restructuring their companies to reduce labour due to higher wages • Ex. Increase minimum wage, less fast food workers hired as it is expensive  Cyclical o Short line changes within the economy o Seasonal changes, recessions, economic changes Job Search and Public Policy (Frictional Unemployment)  Government programs can help workers find jobs faster (faster info about job spreads, the fast the natural rate of unemployment can decrease) o Training programs: Give workers specific training to certain industries in order to employ them there o Government run employment agencies which spread information  Privately this is also possible o Newspaper ads, the internet, networking events can match employer up with workers through the market itself with no government intervention Minimum Wage (Structural Unemployment)  Legal minimum that firms have to offer to workers o Meant for least skilled and inexperienced workers like teenagers  Minimum binding is when the wage is above equilibrium  More people want to work as they can get higher wages (supply), but firms want (demand) less employees  This leads to a surplus of labour meaning people can’t find jobs because not many are being offered because of increased minimum wage Minimum Wage is set above equilibrium *Note: In the real world, labour market looks more like this What about Unions?  A union is a worker association that bargains with employers over wages and working conditions o Many Canadians are part of unions to ensure their rights and needs are being met o Highest in the public sector o Acts like a cartel in which a group of people work together in hopes of exerting their joint market power (shift the wages to become higher) o Can strike if bargaining process fails (withdraw from firm as a union) o Also they earn more than the average non-unionized worker  Generally, when a union succeeds in increasing wages, they reap the benefits o But people who are outside the union do two things  They can wait to become part of unionized work  Or find work in another part of the economy that is not unionized o Essentially when workers successfully increase wages in one industry, the supply of labour goes up as others search for jobs in other industries because less labour is being demanded in that industry  This increase in supply of labour reduces wages in non-unionized work as employers hold the most power and seek lower wages o Thus, when unions raise wages in one side of the economy, they effectively reduce the quantity of labour demanded in that industry, causing unemployment, leading to larger supply, and lower wages Efficiency Wages  Firms operate more efficiently with worker productivity if wages are above equilibrium level  This is not to be mixed up with the constraints associated with unions and minimum wage as efficiency wages have flexibility, but its major goal is to provide the best means for workers to be productive o Workers health  Raise wage to make people healthier  This does not apply to developed nations as most of us are healthy but has more effect in less developed countries o Worker turnover  Higher wage, workers are less likely to leave  This leads to less money being spent on training new recruits leading to higher turnover due to inefficient new workers o Worker effort  Higher wages means more effort to work o Worker quality  Wages effect the quality of the work: High wages attracted good employees  Reservation wage: Lowest wage for you to apply to job • High quality for higher wage • Low quality for low wage Monetary System Is MasterCard an Asset?  No  deferred method of payment o pay for it over a course of count Money  In a system of bartering, each person exchanges a good or service for another good or service o The problem with this is that the double coincidence of wants is very rare – meaning someone who wants something the other person has is rare  Money is an asset regularly used to buy goods and services o It is a medium of exchange  Able to trade for goods and services o Unit of account  Post prices, record debts, our measurement o Store of value  Transferring of purchasing power  Retains its value over time  Purchasing power from presence to the future (art, assets, etc.) Is this Money in Canada? o Canadian Quarter  Yes for all of Canada (It is a medium, a unit of account, and has store value) o Mexican Peso  Not in Canada (Not a medium of exchange in Canada, it is a unit of account but it retains no store value within Canada) o Picasso painting  Not all three (It is a unit of account but has no store value, and is not a medium of exchange) o US currency is yes for medium of exchange and store value as they allow for it and in some places can post prices in US currency Liquidity  Ease which an asset can be turned into money o Cash is the most liquid, stocks and bonds a relatively liquid as they can be sold easily, but a house, hockey cards, or an art work requires effort in order to be sold  When price goes up, the value of money goes down  When prices go down, the value of money goes up Commodity Money vs. Fiat Money  Commodity o Money in form of an item that has intrinsic value  Ex. Gold and silver (They are worth something to us but is not actual money in Canada) • Note countries that use gold as money are said to be operating under the gold standard  Ex. Art (worth a million dollars but cannot be used to buy vegetables)  Fiat Money o Established by the government decree to be used as a medium of exchange, but the paper really holds no intrinsic value  The government HAS to approve of it  Ex. The Soviet Union decreed that the Ruble was their currency at the time, but many people did not use that currency because they thought not many store owners would accept it, so they would trade with things that store owners would accept Money in the Canadian Economy  Money Stock: the quantity of money circulating in the economy o To measure the money in the Canadian economy  Include first the currency circulating  The demand deposits in bank accounts  Various other accounts included in bank institutions like savings accounts, mutual funds, etc. o Two measure exist: M1+, and M2  M1+ included chequable deposits and currency  M2 includes a few minor categories and non-personal demand and notice deposits (savings accounts in which money is not withdrawn) and every in M1+  M=C+D  M=quantity of money in the economy  C=currency paper bills and coins in the hands of the public  D=demand deposits: deposits in bank account which depositors can access by writing a cheque (biggest supply) The Bank of Canada  Controls the quantity of money in the Canadian economy o Many other countries as well have bank institutions  Was created during the Great Depression to understand and guard the money supply in Canada to ensure this does not happen again o in practice the bank is separate from the government, though government has final say in fast decisions  Banks likes Scotia Bank, BMO, and Toronto-Dominion Bank are owned by private shareholders and seek profits o Bank of Canada is owned by the government, and give all profits to the government and act in national interest than for profits Four Roles of the Bank  Issuing Currency o The Bank of Canada has the right to issue notes of money into circulation for the economy  Banker to other commercial banks o Commercial banks have deposits in the Bank of Canada in order to facilitate payments between each other o Sometimes commercial banks will go to the Bank of Canada for a loan in order to pay of some payments o Also during financial difficulty for commercial banks, the Bank of Canada may be a lender of last resort  Banker for the Government of Canada o The Government holds deposits in both Commercial banks and the Bank of Canada o BOC manages Canada’s demand deposits, foreign exchange reserves, and national debt  Controlling the quantity of money available to the economy, this is called Money Supply o Decisions by policy makers concerning the money supply
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