Chapter 4: Overview of Economics Flashcards
1
Q
What are the 2 categories of economics?
A
Microeconomics and macroeconomics
2
Q
Define “microeconomics”.
A
The study of behaviours of individuals/individual companies affecting what specific industries and individual companies produce and what individuals buy.
3
Q
Define “macroeconomics”.
A
Focuses on the broader economy as a whole.
4
Q
The primary users and/or suppliers of capital. (3)
A
- Consumers
- Businesses
- Governments
5
Q
How is a “market” defined?
A
Any arrangement that allows buyers and sellers to enter into transactions (can be physical location or electronic platform)
6
Q
What are the laws of supply and demand (all else being equal)?
A
High price, lower demand
Low price, higher demand
Higher price, higher supply
Lower price, lower supply
7
Q
Market equilibrium shortage
A
Low price = higher demand = lower supply
8
Q
Market equilibrium excess
A
High price = lower demand = higher supply
9
Q
What is market equilibrium price?
A
Price point where supply = demand
10
Q
How is Canada’s GDP measured?
A
The value of all of the final goods and services produced in Canada
11
Q
What are the 2 ways GDP can be calculated?
A
- Expenditure approach: total of all the money spent on final goods and services
- Income approach: total of all the income earned producing these goods and services
Should result in the same figure.
12
Q
2 mains reasons for increase in nominal GDP.
A
- Economy expansion
2. Prices increased
13
Q
How is “real GDP” calculated?
A
Real GDP = Nominal GDP - Inflation
14
Q
What contributes to the growth in GDP?
A
- Advances in technology to produce more
- Increase in population and in turn the workforce
- An improved workforce (more training, education)
15
Q
The phases of business cycle.
A
Expansion, peak, contraction, trough, recovery
16
Q
What happens in expansion phase?
A
- Economy is expanding and corporate profits rise
- Inflation is stable
- Businesses are increasing inventory to meet demand
- Business startups outnumber business closures
- Unemployment rate is low
- Stock market activity is strong
17
Q
What to buy/sell in expansion phase?
A
Buy common shares
18
Q
What happens in the peak phase?
A
- Demand exceeds supply
- Labour and product shortages cause wages and inflation to increase
- Interest rates begin to rise/bond prices fall
- Business sales decline
- Corporate profits fall causing stock prices to fall
19
Q
What to buy/sell in peak phase?
A
Sell common shares and buy short term bonds
20
Q
What happens in the contraction phase?
A
- Economic activity declines
- Growth of real GDP slows or turns negative
- Supply exceeds demand and unemployment rises
- Business failures outnumber start-ups
- Stock market activity is low
- Interest rates hit the highest level
21
Q
What to buy/sell in contraction phase?
A
When interest rates hit the highest level, sell short-term bonds and buy long-term bonds
22
Q
What happens in the trough phase?
A
- Inflation falls followed by interest rate fall, causing a bond rally
- Lower interest rates ignite the economy
23
Q
What to buy/sell in the trough phase?
A
When interest rates hit their lowest, sell bonds and buy common shares
24
Q
In what phase is interest rate at the highest vs. lowest?
A
Highest in contraction phase
Lowest in trough phase
25
What happens in the recovery phase?
- GDP returns to previous peak
| - Cycle is followed by expansion and starts over again
26
What to buy/sell in recovery phase?
Continue to own common shares (the cyclical stock)
27
What are the 3 categories of economic indicators?
1. Leading
2. Coincident
3. Lagging
28
What are "leading indicators"?
Change ahead of the economy, useful for anticipating what is going to happen in the near future
29
What are "coincident indicators"?
Change at the same time as the economy, useful to determine when a particular phase began and ended
30
What are "lagging indicators"?
Change after the economy, not useful in predicting changes/confirming when changes occurred
31
Examples of leading indicators.
```
Stock prices
Average hours worked/week
Commodity prices
Manufacturer's new orders
Money supply
Housing starts
```
32
Examples of coincident indicators.
GDP
Retail sales
Industrial production
Personal income
33
Examples of lagging indicators.
```
Plant/equipment spending
Unemployment
Business loans
Labour costs
Inflation
Cost of borrowing (interest on business loans)
```
34
What are the 3 measures/criteria used to identify recession?
1. Depth: substantial decline
2. Duration: decline must last more than a couple of months
3. Diffusion: decline impacts overall economy not just one sector
35
What's an indication of recession?
Negative growth of GDP
36
What are the 2 components of labour force?
Labour force = working + not working but actively searching for work
37
How is participation rate calculated?
Participation rate = labour force/working age population
38
How is unemployment rate calculated?
Unemployment rate = not working but actively searching for work/labour force
39
How is employment rate calculated?
Employment rate = working/labour force
40
Define "discouraged workers".
The component of the working age population that are not working and have given up looking for work
41
3 arguments against unemployment rate.
1. Discouraged workers not captured in unemployment rate and could be misleading to the health of the economy
2. Does not capture the average duration of unemployment
3. Does not address those underemployed.
42
Name the 4 types of unemployment.
1. Frictional
2. Cyclical
3. Structural
4. Seasonal
43
What is "frictional unemployment"?
No matter how healthy the economy is, there is always some level of unemployment.
44
What is "cyclical unemployment"?
Caused by changes in the business cycle.
45
What is "structural unemployment"?
Long-term and caused by advances/changes where workers do not have the skills needed to fill jobs.
46
What is "seasonal unemployment"?
Unemployment that occurs within seasonal industries.
47
Which two types of unemployment exist independent of the business cycle?
Frictional and structural
48
Variables that impact interest rates. (6)
1. Supply and demand
2. Default risk
3. Foreign interest rates
4. Exchange rates
5. Central bank credibility
6. Inflation
49
What is "risk reward relationship"?
The higher the default risk, the higher the interest rate
50
How is interest rate affected by exchange rate?
If CAD falls, government can increase interest rates, which increases foreign investments, and in turn increases the deamand for CAD
51
How do higher interest rates impact the economy? (3)
1. Cost of borrowing for businesses increases, making it harder to invest more capital into the business
2. Consumers discouraged from buying large expenditures on credit
3. Cost of borrowing for existing debts increase
52
Define "money". (3)
Money is:
1. Medium of exchange
2. Unit of account
3. Store of value
53
The cause of inflation can be categorized in 2 ways.
1. Demand-pull inflation
| 2. Cost-push inflation
54
What is "demand-pull inflation"?
Demand increases = company expenses increase = price increase
55
What is "cost-push inflation"?
Manufacturing costs increase = price increase
56
Inflation vs. deflation
```
Inflation = price increases
Deflation = price falls
```
57
What happens in deflation?
Knowing price will drop = delay consumption > sales decline > profits decline > unemployment increases
58
What is "disinflation"?
Reduction in inflation, which still exists, but just not as high as before. Prices are increasing but just not as fast.
59
How is inflation measured?
Statistics Canada tracks Consumer Price Index (CPI)
60
What is Consumer Price Index (CPI)?
Basket of goods (600) representing what the average Canadian household buy
61
How is inflation rate calculated?
Inflation rate = Change in CPI from T1 and T2/CPI from T1
*if CPI increases it is inflation; decreases it is deflation
62
What are the costs of inflation? (4)
1. Erodes standard of living for those living on fixed-income
2. Reduces the real value of investments
3. Distorts price signals sent to market participants
4. Accelerating inflation causes interest rates to rise and could lead to recession
63
What is the "Phillips Curve"? Explain.
Indirect relationship between inflation and unemployment rate.
1. Lower inflation can be achieved through slower economic growth which results in higher unemployment
2. Lower unemployment can be achieved in the short run by allowing inflation to increase at a faster rate
64
What is "balance of payments"?
Captures Canada's international financial interactions in two accounts:
1. Current account ("trade account")
2. Capital and finance account
65
What is listed under "current account"? (2)
1. Exports and imports (purchase/sale) of goods and services of both governments and individuals.
2. Amounts that are required to service the capital account (eg. interest on loans/dividends)
66
What is listed under "capital and finance account"?
Investment items
67
What drives the value of a currency?
The demand for that currency since currency is subject to the same supply and demand forces
68
What affects the attractiveness of a country's dollar? (7)
1. Commodities
2. Inflation
3. Interest rates
4. Trade
5. Economic performance
6. Public debts and deficits
7. Political stability
69
What is the negative impact on a high Canadian dollar? Positive impact?
Negative: expensive to foreigns importing Canadian goods.
Positive: cheaper for Canadians to import goods from other countries
