Unit 4 - Macroeconomics Flashcards
Principles of the Sharing Economy
- Allow individuals to monetize underused assets
- Involves peer to peer exchange
- Often uses online platforms
Sharing v. Conventional Economy
- Allows direct interaction between buyer and seller
- Involves short-term commitments for one-time jobs
Economic Efficiency of Shared Economy
- Utilizes idle assets, reducing waste
- Offers flexibility in work schedules.
- Users find help quickly.
Shared Economy: Innovation and Entrepreneurship
- Shared economy supports emergence of new businesses.
- Offer low-risk environments for testing new ideas.
Sharing Economy: Regulatory and Legal Challenges
- Struggle with adherence to labor regulations.
- Complications in taxation and insurance coverage create uncertainties.
Sharing Economy: Labor Concerns
- No benefits like health insurance
- Low wages and inconsistent work schedules.
- Platforms control conditions of work.
- Workers have little bargaining power
Sharing Economy: Market Saturation and Competition
Market saturation makes it hard for new entrants to compete.
Inflation
- Decrease in purchasing power of currency
- Cause: consumers able to buy more goods than available at current price
Demand-Pull Inflation
- Increase in aggregate demand outweighs aggregate supply
- Most common inflation
- Can result in increase in output of goods and services
Demand-Pull Inflation: Increased Govt Spending
Acts as consumer in market, results in less goods/services
Demand-Pull Inflation: Increased investments from firms
- Increases incomes of factors of production; aggregate demand increased
- Contributes least to inflation
Demand-Pull Inflation: Increased spending from households
- Higher incomes
- Larger population
- Money printed
Increased exports by country
- Increased exports increase size of market
- Goods and services consumed outside of the country, resulting in less supply
Inflationary Spiral
As aggregate demand increases, businesses and firms hire more workers, which increases aggregate demand
Cost-Push Inflation
- Aggregate supply decreases relative to aggregate demand
- More concerning, as economic output decreases
Cost-Push Inflation: Increase in cost of raw materials
- Formation of monopolies, allowing higher prices for consumer capital goods
- Natural disasters affecting supply of raw materials
Cost-Push Inflation: Increased production costs
- Increase in wages
- Regulations making production more expensive
- Least common as it decreases demand
Contradictory Monetary Policy
- Reduce money supply in economy by increasing interest rates
- Reduces consumer and business spending
Government Fiscal Policy
- Increase in taxes
- Reduces spending by removing money from economy
Price Controls - Less Effective
Bottom Text
Inflation: Impact on the Economy
- Loss of purchasing power
- Increased cost of living
- Increased Input Costs
Inflation: Impact on Companies
- Raise product prices to offset input costs, balance price hikes to avoid suppressing demand.
- Wages increase to keep pace with inflation, higher labor costs.
Monetary Policy
Central bank controls money supply/interest rates to achieve macroeconomic goals
Monetary Policy Tools
- Open market operations
- Interest rates
- Adjusting reserve requirements
- Discount rate
Actions to Curb Inflation
- Raise interest rates
- Sell government securities (withdraw money from economy)
Consumer Price Index (CPI)
Examines average price change over time for consumer products
CPI Formula
CPI = (cost of basket in year)/(cost of basket in base year) x 100
Basket Categories
- Goods are categorized in baskets, reflecting what consumer purchases within each category
- Ex: housing, clothing basket
Unweighted CPI
- Calculates simple average of price indices of baskets.
- Treats each basket equally, regardless of importance in consumer expenditure
Weighted CPI
Each basket is assigned weight based on how much of total expenditure is spent on that category.
Inflation Rate Calculation
(index base+1 - index base) x 100/ index base
Deflation
Decline in prices for goods and services, increasing purchasing power
Causes of Deflation
- Lower production costs
- Increased aggregate supply OR decrease in aggregate demand
Good Deflation
Naturally occurs due to increases in economic output, increasing employment
Bad Deflation
Deflation from consumer side of the economy, leading to many problems
Effects of Deflation
- Higher unemployment
- Deferred consumption
- Falling consumer confidence
- Decreased investment
- Difficulty repaying debt
Unemployment Definition
Portion of workforce actively searching for work but unable to find a job.
Three groups of population
- People aged < 15
- Eligible to work but choose not to
- Labor Force
Labor Force Definition
- People ages 15+ who supply labor for production of goods and services
- Includes those currently working or looking for work
Frictional Unemployment
- Occurs from changing jobs voluntarily
- Results from market processes taking time
- Least problematic and short-lived
Cyclical Unemployment
- Results from reduction in demand for consumer products.
- Rises during recessions and falls during periods of growth
Cures to Cyclical Unemployment
- Implementing fiscal policies to help influence consumer spending
- Ex: Cutting taxes, increasing transfer payments
Structural Unemployment
- Occurs when skills or location of workers are no longer demanded in economy.
- Displaced workers can be unemployed for long periods or leave labour force.
Cures to Structural Unemployment
- Provide training programs or help unemployed workers pursue higher education
- Move workers to areas w/ demand
Calculation of Unemployment Rate
(𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑/𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒) x 100
Full unemployment
- Forms of structural and frictional unemployment exists at all times.
- During economic growth, workers feel confident about leaving positions
Natural Rate of Unemployment
6-7%
International Trade Definition
Exchange of goods and services across international borders
Tariffs
Tax on good imposed by importing country
Import Quotas
Sets maximum amount of good imported during time frame
Licenses
Permits company to bring specific goods into country.
Voluntary Export Restraints
Cap that exporting country sets for amount of a good it is permitted to export
Local Content requirements
Mandate that specific proportion of good be produced domestically.
Canada’s Major Trade Partners
USA, China, UK
Crown Corporations’ Advantages
- Ensure public interest hold high standards
- Provides services that can’t be provided by private sector
- Generates more jobs with good pay and benefits for economy
More Crown Corporation Advantages
- Government intervention addresses social problems
- Prevent monopolies forming in market
- Affordable prices
Disadvantages of Crown Corporations
- Distorts prices because they’re monopoly
- End up in losses making taxpayers compensate
More Disadvantages of Crown Corporations
- Less efficient since not profit oriented
- Decisions may be made on political benefits rather than economic factors
Formal Economy Definition
Part of economy regulated by the government by contracts, taxation and labour law.
Underground Economy Definition
Economic activity unreported to the government
Examples of Underground Markets
- Paying with cash
- Tax evasion
- Labour exploitation
Reasons for Underground Markets
- Illegal goods
- Avoiding price controls, taxes, and regulations.
- Supply not meeting demand.
- Corruption facilitating growth.
Impacts of Underground Markets
- Reduction in government funding due to non-taxable transactions.
- Unfair competition and unjust working conditions.
- Can create jobs and boost economic growth.
Limiting Underground Markets
- Education on taxes and benefits
- Reducing tax rates/regulations
Other Ways to Limit Underground Markets
- Legalizing products to bring activities to formal economy
- Proper enforcement and inspections
Exchange Rates
Price of one currency expressed in another currency.
Factors Influencing Exchange Rates
- Interest rates
- Inflation
- Economic Stability
Foreign Exchange Market/Forex Market
Market where currencies are traded
Floating Exchange Rate
Foreign exchange market determines a country’s currency price depending on demand and supply
Advantages of Floating Exchange Rate
- Stability in balance of payments
- Domestic policy freedom
- Increased efficiency
Disadvantages of Floating Exchange Rate
- Exposed volatility of exchange rate
- Imported inflation.
Fixed Exchange Rates
Exchange rate system set firmly by monetary authority concerning foreign currency
Advantages of Fixed Exchange Rates
- Price stability
- Speculation protection
- Inflation control
Pros and Cons of Appreciation
- Cheaper imports and helps control inflation
- Hurts exports and slows down economic growth
Appreciation
The increase in value of a currency
Disadvantages of Fixed Exchange Rates
- Less flexibility
- Risk of speculation
- Reserve dependency
Supply-Demand of Exchange Rates
- Exchange rate (ex: price of CAD in USD) on y-axis
- Quantity (ex: of CAD) on y-axis
Causes of Currency Appreciation (more of factors, more appreciation)
- Interest
- Speculation expectations
- Foreign Investment from other countries
- Incomes abroad
- International competitiveness
Causes of Currency Depreciation
- Firms move away
- Domestic Incomes
Increase of Demand for Currency
Foreigners want currency and exchange local currency for it
Increase in Supply for Currency
Currency is exchanged for another currency
Pros of High Exchange Rates
- Downward pressure on inflation
- Cheaper imports
- Improved efficiency to domestic producers
Cons of High Exchange Rates
- Damage to export industries
- Damage to domestic industries
Reciprocal Exchange Rate
- 1/Current Exchange Rate
- Ex: 1 CAD = 0.73 USD, 1.37 CAD = 1 USD
Money Definition
Any medium of exchange symbolizing value and accepted for payment of goods
Characteristics of money
- Portable, recognizable and retains its value
- Durable and divisible into unit
- Hard to falsify and easy to use
Commodity Money
- Money whose value comes from commodity of which it’s made
- Ex: Gold, silver
Fiat Money
- Currency made legal tender by government
- Doesn’t require backing by commodity, important when economies expanding
- Value set by supply/demand and perceived value
Fiduciary Money
- Written statement of debt in place of standard money
- Value relies on trust between two parties of its use as actual money
- Risk of more IOU’s than supply of money
Commercial Bank Money
Money created through debt issued by commercial banks in an economy
