Offshoring and Outsourcing
Offshoring is the physical relocation of a plant or business to another
Outsourcing is the removal of a part of a business internal process to an
internal company, in this context that means to a company in another
Argument against protectionism
It weakens domestic industries
Without competition, innovation is stifled and products and services never
Consumers end up paying more for G&S for lower quality products.
Job outsourcing can occur, as companies can find innovative solutions to problems
by employing people in other countries to do the work.
Slows Economic growth
Invites other nations to retaliate with protectionist policies of their own.
Why do we need a central bank?
IN order to protect from bankrun.
A central bank is a gov’t run institution that create public institution
1. Issue currency
2. Regulate money supply
3. Controls interest rate
It has supervisory power over the banking industry
1. Regulates all the banks
2. Imposes reserve requirements
3. Act as a “lender of last resort to mitigate things like bank runs”
Currently the central bank holds assets for ex. Foreign exchange, gold, and other
Fraction of Reserve banking
Banks maintain a portion of their total customers deposit in the form of a reserve.
The central bank requires that they keep a minimal amount in reserve to cover the
normal demand for withdrawals.
The Central oversees the activities of the commercial banks.
Provides deposit insurance to consumers, and acts as a lender of last resort to
commercial banks to bail them out in the time of crisis.
The Bank of Canada
Canada follows the British banking system with a limited number of larger banks
with multiple branches.
In the US dependent local banks was the norm.
With our relatively small population spread out over rural area British system made
more sense. Branch banks require less capital than a full independent bank
The Branch banking system made for a very stable banking system since the
branches spread the risk around the country.
There was little need for a lender of last resort. In the US with its small banks they
will often find themselves with seasonal cash flow problems.
The US Federal Reserve was a necessity
The Bank of Canada was originally privately owned but was nationalized in 1938
Some of the previous functions of the department of Finance were deferred to the
Bank of CDA exists “to regulate credit and currency in the best interests of the
economical life of the nation
Deal with the amount of money in the circulation of the economy. The central bank
adjusts short-term instant rates to stimulate monetary expansion, by hoping to
maintain a low and stable rate of inflation. The Bank of Canada sets the overnight
interest rates. Monetary Policy is the realm of the central bank.
Different between Monetary policy and Physical policy
Monetary policy is the actions undertaken by the central bank to achieve each
Physical policy is the tax and spending initiated by the gov’t
Overnight interest rates is the rate used to borrow and lend to each other in short
Each day the bank has numerous business transactions
At the end of the day depending on the day’s activity they may end up with a surplus
or a deficit.
Banks with surplus like to lend to those that have deficit.
The Bank of Canada sets this target once a month with a positive or negative with an
interest of 0.25%. The overnight rate is directly tied to the liquidity of the economy.
The more money their available in the economy the lower the rate is.
Liquidity is the access to cash or credit.
The overnight rate end up affecting the entire spectrum of interest rates:
1. The lower overnight rate increases the demand for credits
2. Banks give out more credits
3. The reserve is also true
Profile of the Financial Industry in Canada (4pillars)
Made up of many different type of business.
2. Trust and Known companies
3. Credit unions
4. Life and health insurance companies
Banking Regulation in Canada 1. Consumers deposit their saving into banks the gov’t wants to ensure their
money is protected from undue risk caused by actions taken by the bank
2. They also do so to root criminal activities like money laundering that can
happen through the bank
3. And as a means to ensure they’re sufficient credit available to keep the
Banks are given minimum requirement in which they are able to operates
Banks are required to have a certain amount of capital determined by the
measurement system (called the Basel Capital accords) to minimize risk through the
Refer to The fractional reserve requirement
Other requirement includes a strict set of corporate governance guidelines, financial
reporting and disclosure guidelines and credit rating requirements.
That is a rating from a rating agency such as Standard and Poor’s that indicated to
investor and depositors how much of a risk this financial institution is.
Regulatory oversight and reporting of t