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MOS 1023 Chapter 9 > Chapter 9.2 > Flashcards

Chapter 9.2 Flashcards

Real vs Financial Assets

1
Q

What is Canada’s balance sheet?

A

A snapshot of what is owned (assets) and what is owed (liabilities) at a particular time

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2
Q

What is the function of the Canadian Balance sheet?

A

Aggregates the market value of the assets and liabilities of the three major domestic groups in our economy

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3
Q

What is “net worth”/equity?

A

The difference between the value of what is owned and what is owed

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4
Q

What is an example of equity?

A

The equity someone has in a house

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5
Q

What 2 types of groups can we estimate balance sheets for?

A
  1. Individuals
  2. Institutions (both businesses and governments)
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6
Q

What are the 3 major domestic groups in the Canadian economy (as of 3rd quarter of 2018)

A
  1. Individuals referred to as the household sector by StatsCan
  2. Businesses
  3. Government
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7
Q

What is the non-resident sector on the Canadian Balance sheet and why do we “net” it out?

A

The Canadian assets and liabilities that are held by non-resident individuals, businesses, and governments

“Net” out to determine what the country owes to or is owed by non-residents

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8
Q

What does it mean if (in 3rd quarter 2018) Canadians had total real assets with a market value of $11,415 billion and non-residents had net financial assets of $648 billion?

A

We owed less to non-residents than we owned as foreign assets.

From Canada’s balance sheet perspective: we had net foreign financial assets of $648 billion

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9
Q

What was Canada’s net worth if (in 3rd quarter 2018) Canadians had total real assets with a market value of $11,415 billion and non-residents had net financial assets of $648 billion?

A

Net worth: $12,063 billion ($11,415 + $648)

or approximately $326,000/Canadian based on a population of 37 million

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10
Q

Although Canada had a lot of debts, how did their balance sheet balance out?

A

We had lots of debts, but these were simply to other Canadians.
When we add everything up, these debts to ourselves net out to zero because one person’s debt is another person’s asset

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11
Q

What are real assets?

A

The tangible things that compose personal and business assets

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12
Q

What are the 7 major classifications real assets are under?

A
  1. Residential structures
  2. Non-residential structures
  3. Machinery and equipment
  4. Consumer durables
  5. Inventories
  6. Land
  7. Others
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13
Q

What are personal assets?

A

The value of houses (residential structures), the land the houses are on, the major appliances in the houses (televisions, washing machines, etc.), and cars

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14
Q

What are major appliances, such as cars, referred to on the balance sheet and why?

A

Consumer durables because they last many years.

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15
Q

What are major assets for businesses?

A
  • Office buildings, factories, mines, and so on (non-residential structures);
  • the machinery and equipment in those structures;
  • the land they are on;
  • the stock or inventories of things waiting to be used or sold
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16
Q

Why is Canada’s national balance sheet significant?

A

Because finance is essentially the management of an entity’s balance sheet (involves the real asset side and liability side of a balance sheet)

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17
Q

Give examples of asset acquisitions.

A

Decision to build a new factory, increase the level of their inventory holdings, buying another firm (mergers and acquisitions)

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18
Q

What is asset acquisition generically referred to as?

A

Capital expenditure (capex) decisions

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19
Q

How does finance involve managing the liability side of the balance sheet?

A

The liability side are ways to finance these expenditures

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20
Q

What are liabilities referred to as in finance?

A

Corporate financing decisions (decisions made also by individuals and government because all entities have a balance sheet)

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21
Q

Why is there a danger in only focusing at Canada’s balance sheet?

A

Because it focuses attention on (only) things that we can measure

StatsCan only estimates only a part of the UN Reports inclusive definition of wealth (human and natural capital)

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22
Q

What is the more inclusive definition of wealth based on a 2008 UN report directed by Sir Partha Dasgupta at Cambridge Uni?

A

Includes both human capital (based on the skills and education of citizens of a country, and natural capital (based on land, forests, fossil fuels, and minerals)

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23
Q

What place and how much total wealth did Canada come out as based on the inclusive definition provided by the 2008 UN report?

A

7th wealthiest country with total wealth US$502,972 per person in 2010

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24
Q

Although the national balance sheet is useful for understanding wealth and the different types of real assets, why does it remove most things of interest to those studying finance?

A

Nets out all the debts Canadians owe to other Canadians, which is almost all debts

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25
What are financial assets?
A claim that one individual or institution has on another
26
What does StatsCan do to data when preparing the National Balance Sheet Accounts (NBSA)?
Disaggregate data
27
What does it mean to disaggregate data and when is it used/what is it's purpose?
Look at data in greater detail Used to understand financial assets and how financial systems work
28
What is the NBSA and who is prepared by?
NBSA = National Balance Sheet Accounts prepared by StatsCan
29
What is the basic idea behind the NBSA?
To collect financial data on the major agents in the financial system and then track the borrowing and lending between these agents
30
Give an example of StatsCan collecting financial data on a major agent in the financial system when preparing the NBSA
Collects data on all persons and unincorporated businesses in Canada and groups them into the household sector
31
Why does StatsCan collect financial data based on major agents in the financial system (ex: household sector)?
Individuals as a group tend to lend assets to other major agents in the system, thereby creating financial assets. However within the household sector, what one person lends to another is offset by what that person owes: positive financial assets offset by what that person owes, so # are the net real assets and the net financial assets of Canadian households
32
What are examples of assets in the Canadian household sector on the Canadian balance sheet and what do they represent of the Canadian economy?
Who owns what in the Canadian economy Tangible assets such as homes and cars, in aggregate
33
How much in real assets did Canadian households own in Q3 of 2018?
Market value of $6,310 billion
34
What are examples of net financial assets owned by Canadian households?
Those issued by the government, corporations, and non resident
35
How much in financial assets did Canadian households own in Q3 of 2018?
Market value of $4,910 billion
36
What was the value in aggregate of total net assets of Canadian households in Q3 of 2018 and how does it compare to Canada's total net assets?
Tangible assets ($6,310 billion) + Financial assets ($4,910 billion) = $11,220 billion, slightly smaller than Canada's total net assets of $12,063 billion
37
In Q3 of 2018, all layers of the Canadian government, in aggregate, had real assets worth $1,034 billion. What were the bulk of these real assets?
Government office buildings and the machinery and equipment in them and $151 billion represents the market value of government-owned land
38
Although in Q3 of 2018, the Canadian government had real assets worth $1,034 billion, how much did they have in net financial assets and what does it mean?
Net financial assets of negative $786 billion: a net financial liability of $786 billion, which is the market value of all government debt outstanding
39
Canadian corps and government and Crown operations had real assets w/ market value of $4,072 billion in Q3 of 2018. What real assets does this financial figure represent?
Factories, mines, office buildings, and so on, needed to produce the goods and services that we buy
40
What was the market value of the net financial assets issued by the business sector to finance real assets (corporate financing) in Q3 of 2018?
-$3,476
41
What is corporate financing?
Financial assets issued by businesses to finance their real assets
42
When the value of real assets owned by the 3 domestic sectors is added it equals a total market value of real assets of $11,416 bil. However when the total net financial assets of the 3 sectors are totaled, end up with financial assets of $648 bil. What does the $648 bill equal to/what does the value of represent?
Equals exactly the net financial assets owed by Canadians to non-residents
43
How is the value of net assets owned by Canadian residents (in Q3 of 2018) calculated?
Value of net assets owned by Canadian residents (our net worth) is the sum of total market value of real assets and total net financial assets of the 3 sectors: $11,416 bil + $648 bil = $12,064 bil
44
What should be noted about the net financial assets figure for the household sector relative to the gov and business sectors? What does the difference reflect?
Net financial assets for household sector: POSITIVE $4,910 bil Total net financial assets of combined gov and business sectors: NEGATIVE $4,262 bil Difference: reflects the net foreign assets of $648 bil
45
Overall what does the NBSA data indicate about the financial situation of Canadians?
We are in pretty good shape
46
What is the flow of savings from households (as shown by the Canadian National Balance Sheet accounts)?
To governments and business, with some money flowing in from non-residents But doesn't show the flows within each sector
47
What 4 major areas of finance does the flow of savings from households to gov, business, and non-residents highlight?
1. Personal finance 2. Government finance 3. Corporate finance 4. International finance
48
Although corporate finance is our focus, why is it important to realize that the 4 sectors are part of the financial system?
All part of the financial system = are affected by same types of phenomena (a shock in the government or international sectors can quickly work thru the system to affect personal and corp finance and vice versa)
49
What sector represent the primary source of savings?
Households
50
In aggregate how does the household sector look like (Q3 of 2018)? What types of real assets and financial assets and how much are they worth?
Major real assets: houses = $2,382 bil consumer durables (such as washing machines and cars plus other miscellaneous assets = $695 bil land which houses are built = $3,091 bil Major financial assets: money on deposit mainly with the banks = $1,453 bil debt securities = $134 bil value of pension and insurance assets = $2,640 bil market value of the shares in corporations = $2,750 bil
51
In aggregate, Canadian households have $2,220 bil in financial liabilities, what is the relationship between these liabilities and financial assets?
Offset against the $7,056 bil in financial assets
52
What are the main financial liabilities of offsetting financial assets of Canadian households ?
Consumer credit (mainly credit-card debt) = $651 bil Loans (mainly bank loans) = $113 bil Mortgage debt taken out to buy our houses = $1,428 In aggregate, Canadian households have $2,220 bil in financial liabilities
53
If Canadian households have $2,220 bil in financial liabilities to offset against the $7,056 bil in financial assets, what net financial assets does it leave them with? Why is the calculated net financial assets less than that reported in the national balance sheet?
$4,836 bil, which is $74 bil less than the $4910 bil reported in the national balance sheet, which includes $74 bil in net financial assets of non-profit institutions serving households
54
What are the household sector's liabilities? What kind of financial assets can they be netted out against?
Household sector's liabilities are all different forms of debt, which can be netted out against the debt-like financial assets (namely deposits at banks and loans)
55
What 2 major financial assets of the household sector are left when the sector's liabilities are netted out against the debt-like financial assets?
1. The market value of investments in shares 2. The market value of investments in insurance and pensions
56
What is a good starting point when trying to understand wealth distribution within a country?
Consider how borrowing and lending changes throughout the life cycle of individuals as they get older
57
What are the key decisions most people make when individuals go thru life cycle and get older?
1. Saving to buy a house 2. Saving for retirement
58
What is the basic problem in retirement planning?
Determining how to finance non-working retirement years when we will be consuming but not earning
59
What is the basic problem when wanting a house?
How to save to buy it and then pay down the mortgage so we are mortgage-free as we age and begin to think about retirement
60
When considering the problems when retirement planning & buying house, what should we think about?
Financial assets and liabilities (from national balance sheet accounts)
61
What significant differences between people in the household sector can be observed when considering problems when wanting to buy a house/saving for retirement in relation to financial assets and liabilities?
Younger individuals borrowing to buy houses and consumer durables and having net -ve financial asset position (i.e. THEY ARE IN DEBT) As they age, pay down mortgage and build up their financial assets Older higher-income individuals tend to save and be wealthier
62
In relation to age, who do we typically see lending and who do we see borrowing from them? When is dynamic between age groups lost?
Older individuals lending and younger ones borrowing By aggregating across everyone within the household sector, the dynamic is lost
63
What does a large part of household wealth consist of?
- Insurance - Pension claims
64
What are pension claims?
Promises made by a government or private company to pay money to individuals after they retire
65
How good are the "promises" made with pension claims? What can compromise the ability to fulfill promises in private companies?
If the promises are made by private company, ability to fulfill can be severely compromised if its own future is in doubt
66
What kind of issue can arise when private companies may not be able to fulfill their promises?
Pensions can be a major issue in salary and benefit negotiations
67
In Q3 of 2018, mortgage debt was $1,428 bil and value of housing stock was $2,382 bil. On avg, how many % of the value of a house were mortgages worth?
Mortgages were worth 60 percent of the value of a house
68
Although in Q3 2018 mortgages were worth 60% of the value of the house, how do people's individuals mortgage situations differ?
Some people were mortgage free, whereas many others had only recently taken out a mortgage and were heavily indebted
69
What are factors that affect the financial system how do they affect it?
Shocks to the financial system: recession, job loss, collapse in house prices Can have huge impact on the mortgage market and, through it, the whole financial system
70
What are key questions when observing the financial system?
- How does money flow from those who have it to those who want it? - Who are the agents in the financial system? - What are the types of securities issued?

MOS 1023 Chapter 9 (5 decks)

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