Up to Finals Flashcards
Canadian Federation of Independent Business (CFIB)
It serves as a pivotal advocate for small businesses across Canada, offering timely insights on developments relevant to small business.
Chief Economist: Simon Gaudreault
Canadian Chamber of Commerce (CCC)
200,000 Canadian businesses that are represented by the CCC rely on the chief economist, Stephen Tapp.
How does CFIB and CCC help Canadians?
They manage inventory based on sales outlook.
They export planning based on recession signals.
Potential Output (Long-Run)
The level of output that occurs when all resources are fully employed.
-What we can sustainably produce given out current resources.
Business Cycles (Short-Term)
Short-term fluctuations in economic activity.
-Short-run deviations from potential output.
Upswings in the Business Cycle
aka. Expansionary Phase: are characterize by a general improvement in multiple macroeconomic indicators, not just real GDP, though usually real GDP growth will be increading.
Key Characteristics of an Upswing
-Real GDP Growth
-Employment Growth
-Industrial Production
-Consumer Spending
-Business Investment
-Confidence Indicators
-Credit Expansion
Downswings in the Business Cycle
aka. Contractionary Phase: are characterized by broad-based decline in economic activity, sometimes preceding or comprising a recession. Real GDP growth usually will decline.
Key Characteristics of Downswing
-Real GDP Contraction
-Employment Decline
-Industrial Slowdown
-Falling Consumer Spending
-Reduced Investment
-Low Confidence Levels
-Credit Contraction
Recessions & Societal Well-Being
Mental Health:
-Unemployed Americans and Canadians are 2.5x more likely to suffer from depression and anxiety.
Divorce:
-Men without full-time jobs in the US are 33% more likely to divorce.
Suicide:
-A 1% rise in US unemployment is linked to a 1% increase in the suicide rate.
Output Gap (Negative / Positive)
The difference between actual and potential output, measured as a percentage of potential output.
Negative: the economy is producing less than it can.
Positive: the economy is producing more than its potential (boom).
Common Characteristics of Business Cycles
-Recessions are short and sharp, expansions are long and gradual.
-Business cycles are persistent.
-Business cycles impact many parts of the economy.
Leading Indicators
Variables that tend to predict the future path of the economy.
-Give a sense of where the economy is headed.
-Tend to change first.
Ex. Business confidence, consumer confidence, the stock market.
Lagging Indicators
they reflect past economic performance, confirming trends or changes
in the economy.
Okun’s Rule of Thumb
For every percentage point that actual output is less than potential output, the unemployment rate will be around one-third a percentage point higher.
Ex. decline from 0% to -3%, unemployment rate will likely rise by about 1%
Seasonally Adjusted (Macroeconomic Data)
Data stripped off predictable seasonal patterns, it helps you see underlying trends.
Annualized Rates
Different data series are collected at different rates: weekly, monthly, quarterly, annually.
It is essentially data converted to the annual rate that would occur if the same rate had occurred throughout rate.
Real Data
Adjusted for inflation.
Nominal data on GDP can make it difficult to tell whether an increase reflects rising prices or rising quantities.
Data Revisions
Revisions are updates to later estimates.
This is because some data are frequently revised. Because initial estimates can be based on incomplete data.
Top Ten Economic Indicators
- Real GDP
- Export Data
- Unemployment Rate
- Payrolls
- Building Permits
- Capacity Utilization
- Retail Sales
- Inflation
- Labour Cost Index
- The Stock Market
Leading Economic Indicators
they signal potential future economic activity, making them valuable for forecasting.
- Stock Market Performance
- Manufacturing Orders (New Orders)
- Consumer Confidence Index (CCI)
- Building Permits
- Jobless Claims
- Money Supply (M2)
- Yield Curve
- Purchasing Managers’ Index (PMI)
Lagging Economic Indicators
they reflect past economic performance, confirming trends or changes in the economy.
- Unemployment Rate
- Corporate Profits
- Consumer Price Index (CPI)
- GDP
- Interest Rates
- Outstanding Loans
- Inventory Levels
- Wages
An Economy Watcher’s Guide
- Track many indicators, not just one
- Broad indicators BEAT narrow indicators
- Seek just-in-time data and distinguish between leading and lagging indicators
- Find the signal amid the noise
- Adjust your outlook when data differ from expectations
The Bank of Canada
Central banks determine a country’s monetary policy. The BOC is our central bank.
Bank of Canada Act in 1934: use tools to calm the fluctuations in general level of:
1) Production
2) Trade
3) Prices
4) Employment
BOC Promotes Economic Welfare Through (3 other core functions)
1) Financial System Stability:
- Ensures that the financial system (banks, markets, payments) functions efficiently and is resilient to shocks.
-Ex. During covid purchased short-term bonds from commercial banks to avoid credit freezes.
2) Currency Issuance:
-Designs, issues, and manages Canada’s currency, maintaining public confidence in its legitimacy.
-Ex. Introduction of polymer banknotes (2011-2013)
3) Funds Management:
-Acts as the fiscal agent for Government of Canada–managing foreign exchange reserves, etc.
-Ex. During covid the BOC supported the IMF by lending our foreign currency.
Monetary Policy
The process of regulating money supply and setting interest rates to influence economic conditions.
Key Monetary Policy Tools
1) Overnight Rate (main tool!)
- This is the interest rate the BOC wants to see in the overnight lending market, where commercial banks lend to and borrow from each other for one day.
- This rate influences all other interest rates in the economy – for loans, savings accounts, etc.
- Raise it to cool inflation; lower it to stimulate economic activity.
2) Open Market Operations
- The BOC buys or sells government bonds in the open market to influence short-term interest rates and liquidity.
- Buying bonds injects money into the system (expansionary)
Selling bonds withdraws money (contractionary)
Bank of Canada Independence
- The BOC conducts monetary policy with significant independence from the government.
- The BOC is a crown corporation, not a federal government department.
- Crown corporations exists where government wants to deliver a public function but also maintain a degree of operational independence, often to preserve credibility, neutrality, or efficiency.
- Federal departments are direct tools of government will
- Research shows that countries that give their central banks independence have lower inflation rates.
Less political Interference
Crown Corporation
Legal Status: separate legal entity (corporation)
Governance: operates with a board of directors; headed by a CEO or Governor
Autonomy: operates at arm’s length from government; more operational or independence
Mandate: Often delivers commercial or specialized public services
Financials: may generate its own revenue (though not always for profit); budget less tightly controlled.
Accountability: reports to Parliament through a responsible minister, subject to audits.
Federal Government Department
Legal Status: part of the executive branch of government
Governance: headed by a Minister and managed by public servants
Autonomy: directly controlled and managed by government ministers
Mandate: implements government policy and delivers public programs
Financials: funded directly through government appropriations; tight fiscal control
Accountability: directly accountable to Parliament through ministers.
Monetary Policy in 5 Steps
- Economic Model Output
- Major Briefing
- Policy Recommendations
- Making the Decision
- Communication
The Bank’s Policy Goals and Decision-Making Framework
The Bank’s Mandate:
-Low and stable inflation
-Low (but not too low) and stable inflation creates a predictable environment for businesses and investors which fosters economic growth and stability.
Four Reasons Why the Bank Doesn’t Target Zero Inflation
- Inflation greases the wheels of the labour market
2.The bank can lower real interest rates by more when inflation is above zero - A 0% inflation target runs the risk of deflation
- Measured inflation may be overstated
Four Factors that Shape the Bank’s Policy
- The neural real interest rate
- The nominal interest rate
- The bank compares inflation with its target inflation
- The output gap
Policy Rule-of-Thumb Formula
Overnight Rate - Inflation =
Neutral real interest rate + 1/2 * (inflation - 2%) + Output gap
How to Bank Sets Interest Rates
- Monetary Policy
- Overnight Rate: the nominal interest rate the Bank uses as its policy tool.
Tools the Banks Uses to Influence the Overnight Rate
- The Bank offers to lend and borrow overnight funds.
- The Bank injects or withdraws overnight funds.
- The Bank lends and borrows bonds.
- The Bank buys and sells government bonds.
The Ripple Effect Throughout the Economy
The Bank’s adjustment of the overnight rate eventually affects nearly every corner of the economy!
> Other interest rates
Consumption today vs. tomorrow
Investestments
Value off the Canadian Dollar
Unconventional Monetary Policy
Primary Tools: the overnight rate
- Limitation: zero lower bound for nominal interest rates
Other tools: encourage additional spending by pushing longer-term interest rates down.
-Forward guidance: providing information about the future course of monetary policy in order to influence market expectations of future interest rates.
-Quantitative easing (QE): the bank’s strategy of purchasing large quantities of longer-term government bonds and other securities, such as bonds from financial institution, in an effort to among other things, put downward pressure on long-term interest rates, including mortgages.
