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 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: 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.