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Chapter 2

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Queen's University
COMM 200
Gary J Bissonette

COMM200 Week 4 Readings Chapter 2 – The Canadian Economic Environment Canada and its Economic System - Productivity gains, strong business investment, technological innovation, moderate wage increases, and a favourable currency exchange rate are all key factors which are deemed to be critical in ensuring that our economy remains resilient and competitive now and in the future - Specific products driving Canada’s economy: o Crude oil and other petroleum gases o Wheat o Canola o Other agricultural based products o Metals o Minerals - Manufacturing drivers of Canadian economy: o Telecommunications o Aerospace o Energy support products (e.g. gas turbines) o Forestry-related products o Automotive sector Key Economic Influencers Contributing Factors to Economic Development - Core requirement to stability/growth of any economic system -> ability to support/promote both current and future economic activity o Encompasses providing a stable environment for economic growth + ensuring required business + economic mgmt. systems are in place to support organized approach to economic development FACTORS - Political Stability - Established Factors of Production o E.g. roads, ports, utility systems, educated work force, technology-based mgmt. systems - Manageable Levels of National Debt - National Monetary Policy & Banking System - Low Inflation - Effective Legal System - Sufficient levels of investment - Absence of Corruption - ComparativeAdvantage o Our possession of a strong natural resource base results in our having a comparative advantage in commodities and energy market sectors Underlying Economic Model - Abalanced relationship needs to be established between three fundamental market composition principles for economic development: o 1) The Law of Supply and Demand o 2)Allowance for private ownership, entrepreneurship and wealth creation o 3) Extent of government involvement in influencing economic activity and direction Law of Supply and Demand - Law of Supply and Demand: ability of the market, independent of external influences, to determine the price for which a product or service will be bought and sold o Demand: number of purchasers willing to pay for a product/service at various price points  Inelastic: when movement in price doesn’t result in significant changes in demand  Elastic: situation where the quantity demanded does change significantly due to a change in price o Supply: reflects how much of a product/service producers are willing to provide the market at various price points - Together the concepts form the basis for the Law of Supply and Demand: o Refers to the point where the quantity supplied equals the quantity demanded  When prices fall too low, a shortage may occur due to demand exceeding supply or willingness to supply and vice versa  When such events occur, in the absence of other external factors, the market will correct itself back to an equilibrium price - In some situations, price may be influenced/controlled by external mechanisms such as duties, tariffs, subsidies, or regulatory practices - In other settings, much freer rein, in which the law plays a much bigger role in the actual price being charged Allowance for Private Ownership, Entrepreneurship, and Wealth Creation - This principle refers to the openness of the market to support, encourage and promote concepts of private enterprise, personal ownership, entrepreneurship and wealth creation o Some economics (e.g. USA, Canada) fully support these concepts in a climate of risk versus return; others not so much (e.g. North Korea) Government Involvement in Influencing EconomicActivity and Direction - OPEN SYSTEM o Governed largely by the law of supply and demand o Provides full + open access to the principles of private ownership, entrepreneurship and wealth creation o Possesses an absence of regulation by gov’t o Foreign trade and movements in labour and capital largely unrestricted - CONTROLLED SYSTEM o Pretty much opposite of open system - MIXED ECONOMIC SYSTEM o Within today’s global economy, no system can be considered completely open o The economy of USAhistorically considered closest example of an open system given its significant emphasis on the law of supply and demand, private ownership, entrepreneurship, and wealth creation o However given the recent financial economic crisis, a more significant economic mgmt. role has been undertaken by the gov’t moving the economy into one that is more of a mixed economic system Canada –AMixed Economic System - Canada, like most fully developed countries is considered a mixed economic system o We allow the law of supply and demand to significantly influence the market o Principles of private ownership, entrepreneurship, and wealth creation are supported o The government attempts to manage and influence economic activity through a cooperative/competitive model participating where and how it feels it is of benefit to the market as a whole  Also manages the economy via its power of taxation, regulation, national debt targets, provincial transfers, and monetary policy control The Economy in Simple Terms 1) Expenditures: Purchases made 2) Savings: Dollars set aside which today which will support economic activity and wealth creation in/for the future o E.g. placing money in RRSP or purchasing GICs 3) CapitalAsset Investments: investments you are making today in order to further expand your capacity to conduct and expand your productivity and overall economic capacity o E.g. investments in real estate 4) Credit: borrowing dollars to support expenditures/investments made - Economic Activity = Expenditures + Savings + Investments + Credit The Economic Growth Cycle - Gross Domestic Product: metric for the total value of a nation’s economy; includes: o Goods and services which are produced and purchased domestically for consumption o Business investments within the economy o Goods produced for export purposes o Government spending - Economists track the movement of GDP over a period of time to determine whether an economy is growing or contracting - Key economic drivers vary from country to country o E.g. People’s Republic of China -> key economic driver = production of goods/services o E.g. USA-> key economic driver = consumer spending o E.g. Canada -> 60% GDP driven by consumer spending (< USA– 70%), other factors include natural resource sector, technology sector, and energy-producing industries  This broad base of economic activity enables our economy to withstand economic downturns in one sector, thereby preventing it from having a detrimental influence on economic activity as a whole - Although key economic drivers may vary, the overall process in which activity is stimulated is largely the same: - A) ECONOMIC GROWTH o 1) Growth in the economy, via its GDP driver(s) result in an increase in corporate revenue and profits and government tax revenue o 2) due to increase in profits and tax revenue -> both business + government have increased capacity to invest in new infrastructure + product/service offerings; investments expand infrastructure thus further stimulating economic activity o 3) increased business activity = need more employees = expand employment opportunities o 4) with an increase in need for workers, employers are forced to pay higher wages to attract + retain employees = more dollars to spend = economic growth  As long as the real wage growth outpaces inflationary pressures, true economic growth will occur - B) ECONOMIC CONTRACTION o 1) Softening of consumer spending -> places downward pressure on corporate profits + government tax revenues o 2) Leads businesses and government to reduce spending -> reduces investment in economic expansion-based activities o 3) With reduced business/government/consumer spending -> fewer workers needed -> negative impact on employment requirements -> increasing supply of available workers -> increasing unemployment rates o 4) results in less dollars for consumers to spend -> contributes to further slowing of economic activity  The financial crisis prompted significant capital infusion by governments and central banks to ensure liquidity into the financial services sectors + develop mechanisms for job creation  This infusion is considered an abnormal response to general recessionary periods with this liquidity infusion largely debt-based versus being revenue driven as a result of economic activity Managing the Movement in the Economy - Growth in overall economic activity needs to be managed in a way which stimulates investment YET maintains control of inflation and other inefficient economic influencers o This balance is CRITICAL to ensure REAL growth and not one masked by inflation  Balance is maintained by Government of Canada in conjunction with its affiliated regulatory agencies, provincial governments, and crown corporations Trends Impacting the Canadian Market INFLATION - With the anticipated increasing demand for energy globally, and the current challenges we face in meeting this growing need, energy and related products and services will continue to escalate in price o The heavily reliance on energy for production and transportation needs -> result in continued upward pressure on cost base associated with products and services  Cost increases -> transferred to consumers in form of higher prices • QUESTION BECOMES: can we offset our dependency on fossil fuels with alternate fuel sources quickly enough to minimize time-wise a length upward spiral in inflationary tendencies - Similar situation -> food chain; prices associated with grains, coffee, and rice for e.g. due to growing demand globally are on the rise o Many companies shield themselves somewhat through economies of scale and long-term contracts but they can’t absorb cost increases forever Geographic Clustering -
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