The Canadian Economy Chapter 3: The Canadian Economy in a Global Setting The Canadian economy is divided into three groups: business, households, and government. Prepared by: Kevin Richter, Douglas College Charlene Richter, British Columbia Institute of Technology rights reserved. 1 rights reserved. 2 The Canadian Economy 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. Business produces goods and services and sells them to households and government. This takes place in the goods market. rights reserved. 3 rights reserved. 4 The Canadian Economy The Canadian Economy The government buys goods and services from business and buys labour services from households. It also provides services to both business and households. The government gives some of its tax revenues directly back to individuals (income redistribution) and oversees the interaction of business and households in the goods and factor markets. rights reserved. 5 rights reserved. 6 1
Business Consumer Sovereignty and 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. Businesses produce what they believe consumers will buy. Consumer sovereignty means that consumers wishes rule what is produced by businesses. rights reserved. 7 rights reserved. 8 Consumer Sovereignty and Business 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. By channeling the desire to make a profit for the general good of society, the Canadian economic system allows the invisible hand to work. rights reserved. 9 rights reserved. 10 Finance and Business Households 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). Households groups of individuals living together and making joint decisions. In the economy, households vote with their dollars. rights reserved. 11 rights reserved. 12 2
The Power of Households Households as Suppliers of Labour Households influence the other two economic institutions government and business. The largest source of household income is wages and salaries. Households supply the labour with which businesses produce and government governs. rights reserved. 13 rights reserved. 14 Government Government as an Actor 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. All levels of government consume about 20 percent of the nation s total output and employ about 800,000 persons. A referee sets the rules that determine relations between businesses and households. rights reserved. 15 rights reserved. 16 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. 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. rights reserved. 17 rights reserved. 18 3
Income of Provincial and Local Governments, 2003-4 Expenditures of Provincial and Local Governments, 2003-4 rights reserved. 19 rights reserved. 20 Income of the Federal Government, 2003-4 Expenditures of the Federal Government, 2003-4 rights reserved. 21 rights reserved. 22 Government as a Referee Government as a Referee Government sets the rules of interaction between households and business. The big question: What referee role should the government play in the economy? It acts as a referee, changing the rules when it sees fit. It decides whether economic forces will be allowed to operate freely. rights reserved. 23 rights reserved. 24 4
International Issues International Issues International issues must be taken into account in just about any economic decision a country or a firm faces. Global corporations corporations with substantial operations in both production and sales in more than one country. rights reserved. 25 rights reserved. 26 International Issues 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. There is no global government to regulate or control global corporations. e.g., they can shift operations to another country if they don t like the policies of the host country. rights reserved. 27 rights reserved. 28 International Trade 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. 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. rights reserved. 29 rights reserved. 30 5
Differences in the Importance of Trade Exports - the value of goods sold abroad. Imports - the value of goods purchased abroad. 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. rights reserved. 31 rights reserved. 32 What and With Whom Canada Trades 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 Trade deficit imports exceed exports. Trade surplus exports exceed imports. rights reserved. 33 rights reserved. 34 What and With Whom Canada Trades Canadian Balance of Trade Over the past 30 years, Canada s services trade balance has been negative and the 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. rights reserved. 35 rights reserved. 36 6
Canadian Exports by Region, 2003 Canadian Imports by Region, 2003 rights reserved. 37 rights reserved. 38 Debtor and Creditor Nations The current account balance measures trade in goods and services and includes the interest we pay to foreigners. 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. rights reserved. 39 rights reserved. 40 International Trade Differs From Domestic Trade International trade can involve multiple currencies that are bought and sold in foreign exchange markets. 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. rights reserved. 41 rights reserved. 42 7
Institutions Supporting Free Trade Free Trade Organizations Most economists generally favour free trade and oppose trade restrictions. Despite political pressures to restrict trade, nations have entered into a variety of international agreements and organizations. rights reserved. 43 rights reserved. 44 Free Trade Organizations 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. 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. 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. rights reserved. 45 rights reserved. 46 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. 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 enforcement. rights reserved. 47 rights reserved. 48 8
International Economic Organizations International Economic Organizations Governments have developed a variety of international institutions to promote negotiations and coordinate economic relations. 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. rights reserved. 49 rights reserved. 50 International Economic Organizations International Economic Organizations International organizations that encourage international cooperation include: 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. The International Monetary Fund (IMF) a multinational, international financial institution concerned primarily with monetary issues. rights reserved. 51 rights reserved. 52 The Canadian Economy in A Global Setting End of Chapter 3 rights reserved. 53 9