Chapter 3:
The Canadian
Economy in a
Global Setting
Prepared by:
Kevin Richter, Douglas College
Charlene Richter,
British Columbia Institute of Technology
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1
The Canadian Economy

Ultimately the Canadian economy’s strength
is its people and its other resources.

The Canadian economy is far from perfect.
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2
The Canadian Economy

The Canadian economy is divided into three
groups: business, households, and
government.
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3
The Canadian Economy

Households supply factors of production to
business and are paid by business for doing
so.

This takes place in the factor market.
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4
The Canadian Economy

Business produces goods and services and
sells them to households and government.

This takes place in the goods market.
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5
The Canadian Economy

Government:


Buys goods and services from business and buys
labour services from households.
Provides services to both business and
households.
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6
The Canadian Economy

Government:

Gives some of its tax revenues directly back to
individuals (income redistribution).

Oversees the interaction of business and
households in the goods and factor markets.
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7
The Canadian Economy
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8
Business

Business is the name given to private
producing units in our society.

Businesses decide what to produce, how much to
produce, and for whom to produce it.
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9
Consumer Sovereignty and Business

Businesses produce what they believe
consumers will buy.

Consumer sovereignty means that
consumers’ wishes rule what is produced by
businesses.
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10
Consumer Sovereignty and Business

Before deciding to start a business, the key
question is: “Can I make a profit?”

Profit is what’s left over from total revenues
after all the appropriate costs have been
subtracted.
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11
Consumer Sovereignty and Business

By channeling the desire to make a profit for
the general good of society, the Canadian
economic system allows the invisible hand to
work.
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12
Finance and Business

By selling stocks and bonds, corporations
can finance expansions and new
investments.

The dynamic stock market allows initial public
offerings (IPOs) to quickly change value and
to make their owners rich (or poor).
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13
E-Commerce and the Digital
Economy

E-commerce refers to buying and selling
over the internet.

It brings people together at a low cost in a virtual
marketplace where geographical location doesn’t
matter.

It increases information, reduces the importance
of geography, and adds competitive pressure to
the ‘traditional’ economy.
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14
Households

Households – groups of individuals living
together and making joint decisions.

In the economy, households vote with their
dollars.
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15
The Power of Households

Households influence the other two economic
institutions – government and business.
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16
Households as Suppliers of Labour

The largest source of household income is
wages and salaries.

Households supply the labour with which
businesses produce and government
governs.
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17
Government

Two general roles of government are:


An actor – collects money in taxes and spends
that money on its own projects, such as
healthcare and education.
A referee – sets the rules that determine relations
between businesses and households.
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18
Government as an Actor

All levels of government consume about 20
percent of the nation’s total output and
employ about 800,000 persons.
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19
Government as an Actor

Provincial and local government employ over
450,000 workers and spend about $250
billion per year.

They spend their tax revenues on social
services, administration, education, and
roads.
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20
Government as an Actor

Income taxes make up 62 percent of the
federal government’s revenue, while sales
taxes make up about 20 percent.

The two largest categories of spending are
social services and debt charges.
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21
Income of Provincial and Local
Governments, 2003-4
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22
Expenditures of Provincial and Local
Governments, 2003-4
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23
Income of the Federal Government,
2003-4
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24
Expenditures of the Federal
Government, 2003-4
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25
Government as a Referee

Government sets the rules of interaction
between households and business.

It acts as a referee, changing the rules when
it sees fit.

It decides whether economic forces will be
allowed to operate freely.
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26
Government as a Referee

The big question: What referee role should
the government play in the economy?
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27
International Issues

International issues must be taken into
account in just about any economic decision
a country or a firm faces.
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28
International Issues

Global corporations – corporations with
substantial operations in both production and
sales in more than one country.
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29
International Issues

Global corporations offer great benefits for
nations.

Global corporations create jobs, bring new
ideas and new technologies to a country, and
provide competition for domestic companies.
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30
International Issues

There is no global government to regulate or
control global corporations.

They can shift operations to another country
if they don’t like the policies of the host
country.
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31
International Issues

Global corporations sometimes act as
governments unto themselves – they can
dominate the economy of a small nation.
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32
International Trade

The volume and value of international trade
have grown substantially over the last
century.

There have been significant fluctuations in
trade around the increasing trend.
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33
International Trade

Fluctuations in world trade result in part from
fluctuations in world output.

Fluctuations are also explained in part by
trade restrictions that nations have imposed
from time to time.
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34
Differences in the Importance of
Trade

Exports - the value of goods sold abroad.

Imports - the value of goods purchased
abroad.
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35
What and With Whom Canada Trades

Canada’s primary trading partners are the
United States and the European Union.

The majority of Canadian exports and imports
involve manufactured goods.
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36
What and With Whom Canada Trades

Balance of trade – the difference between
the value of exports and the value of imports.

Balance of trade contains two components:


The merchandise trade balance
The services balance
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37
What and With Whom Canada Trades


Trade deficit – imports exceed exports.
Trade surplus – exports exceed imports.
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38
What and With Whom Canada Trades

Over the past 30 years, Canada’s services
trade balance has been negative. Canada’s
merchandise trade balance has been mostly
positive.

The overall balance of trade has been positive,
since the merchandise trade balance
exceeded the balance in services.
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39
Canadian Balance of Trade
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40
Canadian Exports by Region, 2003
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41
Canadian Imports by Region, 2003
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42
Debtor and Creditor Nations

The Current account balance measures
trade in goods and services and includes the
interest we pay to foreigners.
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43
International Trade Differs From
Domestic Trade

International trade involves potential barriers
to trade.



Quotas are limitations on how much of a good
can be shipped into a country.
Tariffs are taxes on imports.
Non-tariff barriers are indirect regulatory
restrictions on imports and exports.
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44
International Trade Differs From
Domestic Trade

International trade can involve multiple
currencies that are bought and sold in
foreign exchange markets.
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45
International Trade Differs From
Domestic Trade

The exchange rate is the rate at which one
currency is traded for another.

The exchange rate is determined by the
demand and supply for the currency.
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46
Institutions Supporting Free Trade

Most economists generally favour free trade
and oppose trade restrictions.
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47
Free Trade Organizations

Despite political pressures to restrict trade,
nations have entered into a variety of
international agreements and organizations.
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48
Free Trade Organizations

The World Trade Organization (WTO) is
committed to getting nations to agree not to
impose new tariffs or other trade restrictions
except under certain limited conditions.
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49
Free Trade Organizations

The WTO is the successor to the General
Agreement on Tariffs and Trade (GATT) –
an agreement among many subscribing
nations on certain conditions of international
trade.
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50
Free Trade Organizations

The push for free trade has a geographic
dimension.

Groups of nations have formed free trade
associations – groups of nations that have
reduced or eliminated trade barriers among
themselves.
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51
Free Trade Organizations

Examples are the European Union (EU) and
the North American Free Trade Agreement
(NAFTA).

NAFTA – Canada-U.S.-Mexico free trade
zone that is phasing in reductions in tariffs.
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52
International Economic Policy
Organizations

There is no international counterpart to a
nation’s federal government.

Any meeting of a group of nations to discuss
trade policy is voluntary.

There is no international body that has
powers of compulsion.
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53
International Economic Organizations

Governments have developed a variety of
international institutions to promote
negotiations and coordinate economic
relations.
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54
International Economic Organizations

International organizations that encourage
international cooperation include:

The United Nations (UN) has no ability to tax
and no ability to independently impose its will on
its members.
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55
International Economic Organizations

International organizations that encourage
international cooperation include:

The World Bank – a multinational, international
financial institution that works with developing
countries to secure low-interest loans.
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56
International Economic Organizations

International organizations that encourage
international cooperation include:

The International Monetary Fund (IMF) – a
multinational, international financial institution
concerned primarily with monetary issues.
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57
International Economic Organizations

There are also informal organizations:

Group of Five – (Japan, Germany, Britain,
France, and the U.S.) –meets to promote
negotiations and coordinate economic
relations among nations.
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58
International Economic Organizations

Group of Ten – sees the addition of Belgium,
Canada, Italy, the Netherlands, Sweden,
Switzerland to the Group of Five.

They do much the same work as the Group of
Five.
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59
International Economic Organizations

Group of Twenty – consists of the Group of
Ten plus 10 of the leading lesser developed
countries.

They address international monetary and financial
issues.
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60
The Canadian Economy in A
Global Setting
End of Chapter 3
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61