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MGM101H5 (376)
Chapter 5

Chapter 5 mgm.docx

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Dave Swanston

Chapter 5 mgm - the Canadian economic environment. Canada and its economic system • Canada possesses one of the most fully developed economic systems in the world with its abundance of natural resources, skilled labour force and sophisticated technology-based businesses have enabled the economy to grow and proper over the past 200 years. • productivity gains, strong business investment, technological innovation, moderate wage increases, and a favourable currency exchange rate are all key factors in ensuring the Canadian economy remains resilient and competitive. • Canada is a member of the g7/8. Which is a quasi-organization comprising the world's major fully developed economies. • g7/8 countries meet at least once annually to discuss major economic. political, and societal issues challenging the global marketplace. • a core requirement to the stability and growth of an economic system lies in its ability to service and promote both the current and future economic activity taking place. • our country is considered to possess a strong, fair and equitable legal system and the existence of corruption is viewed as being minimal in both our public and private sectors. • Our possession of a strong natural resource gives us a comparative advantage when it comes to the commodities and energy market sectors. The end result is that many domestic and foreign companies and investors view Canada as a safe and lucrative place to do business. • Comparative advantage: the ability of a country to produce or supply goods or services at a lower cost than other countries or to possess resources or unique services that are unavailable elsewhere. • foreign direct investment (FDI) - occurs when a company or individual from one country makes an investment into a business within another country. This investment can reflect the physical ownership of productive assets or the purchase of a significant interest in the operations of a business • FDI flowing into Canada comes from USA • Canada is viewed as a safe and lucrative place to do business • the economy is based on 3 principles: the law of supply and demand, allowance for private ownership, entrepreneurship and wealth creation, and extent of govt involvement in influencing economic activity. Law Of Supply and Demand • this refers to the ability of the market, independent of external influences, to determine the price for which a product or service will be bought and sold • demand reflects the number of purchasers who are willing to pay for a product or service at various price points. It can be perceived to be elastic or inelastic. • inelastic demand results when movement in price doesn't result in significant changes in demand • elastic demand reflects a situation where the quantity demanded does change significantly due to a change in price. • supply reflects how much of a product or service producers are willing to provide the market at various prices. • suppliers need to think about the cost of production vs. the revenue that will be received from selling their product, and the change in profit • equilibrium - the point at which supply and demand curves intersect. No surpluses or shortage of goods Allowance for private ownership, entrepreneurship, and wealth creation • this principle refers to the openness of the market to support, encourage, and promote the concepts of private enterprise, personal ownership, entrepreneurship and wealth creation. • markets should be open to support, encourage and promote the concepts of private enterprises • developing economies such as China and India are allowing greater access to these capitalistic principles, while others like North Korea are not Gov't involvement in influencing economic activity and direction • gov't can act as a customer by purchasing goods or services; as a regulator, restricting access or defining competitive protocols within particular economic sectors; as a manager through the powers granted to Crown organizations, such as the Bank of Canada; as a taxation agent; as an economic stimulation agent via grant and subsidy programs; and as a competitor (providing services in direct competition for private-sector businesses) • there is an open system and a controlled system in gov't regulating. • open system: is an economic system that follows the principles of economic freedom: the law of supply and demand, full and open access to the principles of private ownership, entrepreneurship and wealth creation and an absence of regulation on the part of the gov't. this is where foreign trade and movements in labour and capital are largely unrestricted. • controlled system: is an economic system where the fundamentals of the law of supply and demand, private ownership, entrepreneurship and wealth creation are largely restricted or absent, and the government fully controls the economic direction and activity. they are also defined as economies that operate without or experience minimal external trade.( North Korea) • mixed economic system: An economic system that contains components of both open and controlled systems. It includes the core principles of economic freedom with some degree of centralized economic planning and government regulation and involvement. • Canada is a mixed economic system. This means that Canada allows the law of supply and demand to significantly influence the market. • the Canadian gov't is an active participant in the economy but attempts to manage economic activity through cooperative/competitive model using its powers of taxation, regulation, national debt targets, provincial transfers and monetary policy control The economy in simple terms • productivity and its resulting economic activity is based on the four fundamental factors o expenditures: purchases you make to support your daily activities, that are deemed to be of value in meeting sustenance needs and in improving your overall quality of life. (clothes, food, house, transportation) o savings: money that you set aside that will support your economic activity and wealth creation in/for the future. (RRSPs). Your savings are lent to others with the intent of stimulating their economic activity in the hopes of enhancing their wealth and private ownership levels. o capital asset investments: investments you are making today to further expand your capacity to conduct and expand your productivity and overall economic capacity. (if your business needs an additional truck in order to expand, the purchase of this truck is an investment. o credit: the borrowing of dollars to support expenditures or investments being made. • economic activity = expenditures + savings + investments + credit The Economic Growth Cycle • economies grow depending on the development stage of the economy and what is interpreted as its key GDP driver. • the total value of the nation's economy is measured by its GDP (gross domestic product - the total market value of the goods and services [economic output] a nation produces domestically over a period of time). • factors that contribute to economic growth/GDP are o goods and services produced and purchased domestically for consumption o business investments within the economy o goods produced for export purposes o gov't spending • recession: a period of time that marks contraction in the overall economic activity within an economy. This happens when the economy experiences two or more quarters of negative GDP movement. It happens when there is a decline in domestic demand, people aren't spending and businesses aren't investing because of the economic climate impacting individual purchase and business operating decisions. • economic growth in a nutshell:) o GDP depends on spending which in turn will increase revenue and profits and tax revenue o with this increase, businesses are then able to invest in new infrastructure and new products/ services for consumers o increased businesses will require more employees, resulting in a
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