THE ECONOMY AND YOU
KEY CONCEPTS - 3
MONETARY POLICY
Actions taken by a government’s central bank in order to control the amount of
money made available in the economy. The most commonly used action to
accomplish this is to increase or decrease interest rates.
DEFICIT vs DEBT
The difference between what a government spends and what it receives in
revenue (taxes) in a fiscal year.
Deficits that are not paid in full are retired to the national debt (money still owed
to lenders). [Governments may be forced to raise taxes, borrow from Canadian,
foreigners or the Bank of Canada to finance its operations.]
The “debt” is the total sum of all deficits, less all surpluses, over time.
From a taxpayer’s perspective, large government debts, which incur interest
costs and have to be paid back, use up revenue that could be spent on
programs that would benefit us today. It can also mean higher taxes for
future generations.
In the 1996-97 budget year, 31.9% of each federal tax dollar was allocated to
paying the interest costs on the federal debt. This is down from a peak of 36% in
the 1995-96 budget year.
At the end of 1997, the net federal government debt totalled $583 billion. From
a historical standpoint, the federal debt was $932 per person in 1971 compared
to $19,285 per person in 1997.
The government can finance a deficit by raising taxes or by borrowing from
Canadians, foreigners or the Bank of Canada.
This website features a Canadian debt clock.
http://www.ndir.com/SI/education/debt.shtml
This website features the American debt clock-total.
http://www.brillig.com/debt_clock/
The U.S. national debt is now 150% of GDP (2003) compared to less than 100% in 1928.
TRADE SURPLUS
Exports
>
Imports.
TRADE DEFICIT
Exports
<
Imports
According to the diagram in the booklet, in 1997 Canada had a trade surplus
with the U.S.
Canadian imports jumped 2.8 percent in July to C$31.4 billion mainly
due to higher than seasonal demand for vehicles and soaring energy
prices. June's imports were hiked to C$30.6 billion from the
preliminary C$30.4 billion, Statscan said.
Exports to China so far this year surged 58 percent from last year's
level, and is quickly closing the gap on Great Britain, Canada's No.3
export market, a Statscan analyst said.
The U.S. trade deficit, also issued on Friday, narrowed more than
expected in July but was still the second highest in U.S. history at
$50.1 billion, U.S. government data showed.
STATISTICS CANADA WEBSITE
Monthly:
http://www40.statcan.ca/l01/cst01/trad45a.htm?sdi=trade
Up to 2006:
http://www40.statcan.ca/l01/cst01/gblec02a.htm?sdi=trade%20balance
FACTORS LEADING TO AN ECONOMIC DOWNTURN
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Increase in commodity prices
Overheated economy (rising interest rates curtail growth)
Depletion of a natural resource (localized ex. East coast fishery, western
Canada forest industries, Canadian beef farmers, etc.)
Decrease in the price of a natural resource
Natural disasters (floods, hurricanes, ice storms, etc.)
A downturn is declared a recession when economic activity (real Gross
Domestic Product or the total domestic output of products and
services) declines consecutively for six months or more.
PERCENT CHANGE = (147000 – 125000)/125000 X 100%
= 17.6%
Higher employment and lower interest rates seems to have lead to a higher
demand for new homes.
GDP – Gross Domestic Product
Measure of a country’s economic activity. Calculated by adding the total value of
a country’s annual output of goods and services.
GNP – Gross National Product (now called GNI – gross national
income)
GDP + income earned by domestic residents from investments abroad LESS
income sent home by foreigners who are living in the country.
MAJOR INDICATORS
Updated indicators: http://www40.statcan.ca/l01/cst01/indi02a.htm
Economic pulse:
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Gross Domestic Product (or GDP)
rate of inflation
unemployment/employment rates
The Bank of Canada Rate.
CONSUMER PRICE INDEX
Used to detect an increase or decrease of inflation by monitoring the average
change in the price of about 400 different products and services bought by
Canadians.
U.S. INDICATORS
The U.S. is Canada’s largest trading partner (86% of exported goods).
Paying attention to U.S. indicators is vital to business doing business
there because the general condition of the U.S. economy will determine
the demand for their goods and services.