Chapter 4 Flashcards
Difference between microeconomics and macroeconomics
Micro: individual markets of goods and services
Macro: Broader issues of economy
Examples of microeconomic concerns
How prices are established
Why did price of bread increase
How do minimum wage laws affect labour and company
Tax on lumber affecting forest industry
Government tax on mutual funds
Examples of macroeconomic concerns
Interest rates
Inflation
Recession
Government spending
Health of economy
2 factors that largely determine the price paid for a product
Demand + Supply
What is equilibrium price?
Buyers and sellers in the market are balanced
Difference between intermediate good and final good
Intermediate: products used in the manufacture of final goods
Final: products purchased by the ultimate end user
Describe income approach for GDP
Total spending = Total income generated by producing all goods
Adds all income generated by economic activity
Describe expenditure approach for GDP
GDP = C + G + I + (X-M)
Adds consumer, business, government spending, with exports and imports
Describe production approach for GDP
Value-added approach
Calculates output, subtracts value of goods used in production of output
Identify the components of GDP = C + I + G + (X-M)
GDP = Consumer expenditures + Business spending + Government spending + (exports - imports)
Difference between nominal and real GDP
Nominal GDP: Includes inflation
Real GDP: removes inflation
Name 5 phases of the business cycle
Expansion: significant economic growth, inflation is stable, business invests in new capacity, corporate profits rise, start-ups > bankruptcy, markets rise, unemployment steady and falling
Peak: top of the cycle, demand > supply, inflation rises, interest rates rise, sales decline, stocks begin to fall
Contraction: decline in cycle, economic activity declines, GDP declines, reduced production, lay offs, failures > startups, consumer spends less,
Recession if more than 2 cycles
Trough: lowest point in cycle, interest rates and inflation falls, consumers start spending more, stocks and bonds rally
Recovery: returns to original peak, business production increases, no widespread layoff, no significant investments, unemployment still high
Example of leading, coincident, and lagging indicators
Leading: anticipates cycle, housing, new work order, raw material prices, hours worked, stock prices, money supply
Coincident: same time, personal income, GDP, production, retail sales
Lagging: after cycle, unemployment, inflation rates, labor costs, equipment spending, loans
Describe how Statistics Canada judges a recession
Depth: decline must be substantial
Duration: must be more than 2 quarters
Diffusion: must be whole economy, not single sector
What does participation rate represent?
Participation Rate = Labour force / Working age population
Shows willingness of people to work
How does Stats Canada calculate unemployment?
Unemployment rate = Looking for work / labor force x 100
Compare cyclical, seasonal, frictional, structural employment
Cyclical: fluctuates with business cycle
Seasonal: some industries only operate at certain time of year
Frictional: normal, healthy unemployment, between jobs
Structural: lacking skills or education
How do you define a discouraged worker?
People who are available and willing to work but cannot find jobs, and have not made recent efforts to find a job
Name and explain determinants of interest rates (5)
Demand and supply of capital: increase in investments raise capital, raises interest rates, price of credit raises, consumers spend less
Default risk: if interest rates rise, borrowers struggle to pay debt, greater change of defaulting
Foreign interest rates/exchange rates: rise in US interest rates, Canadians will purchase USD, increasing supply of CAD, downward pressure on CAD. (Bank of Canada will intervene to raise short term interest rates)
Central bank credibility: Bank of Canada influences the economy with short term interest rates
Inflation: if inflation set to rise, lenders increase interest rates to compensate for purchasing power
3 ways high interest rates may affect the economy
- Reduce business investments
- Encourage savings
- Reduce compensation
Appropriate method for determining real interest rate
Real interest rate = nominal interest rate - inflation
Formula for CPI
CPI = CPI new - CPI old / CPI old
List some impacts of inflation (4)
- Erodes standard of living (especially those on fixed income)
- Reduces real value of investments
- Distorts the price signals sent to market participants
- Raises interest rates and recession, more severe rise and fall in business cycle
Describe difference between deflation and disinflation
Deflation: steady fall in prices
Disinflation: decline in the rate at which prices are rising. still rising, but at a lower rate
What is an exchange rate
The price at which one currency exchanges for another
Explain determinants of exchange rates (7 points) C,I,I,T,E,P,P
Commodities: Canada is heavily dependent on the export of natural resources, greater demand for commodities = rise in CAD
Inflation: currencies of countries with consistently lower inflation rates rise
Interest rates: high domestic interest rates attract foreign investors
Trades: when importing, must sell CAD to buy other country currency, puts downward pressure on CAD
Economic performance: strong economic performance attracts foreign investors
Public debts: debts are less attractive to foreign investors
Political stability`
