Volume 1- Chapter 4 Flashcards
Define economics
Economics is a social science that focuses on understanding production, distribution, and consumption of goods and services.
What is the focus of a market economy?
Investment, production, and distribution of goods and services are guided by price signals created by supply and demand.
What are the two main areas of study in economics?
- Microeconomics
- Macroeconomics
What does microeconomics generally apply to?
Individual markets of goods and services.
What is the focus of macroeconomics?
Broader issues such as employment levels, interest rates, inflation, recessions, and overall health of the economy.
Who are the three broad groups that interact in the economy?
- Consumers
- Businesses
- Governments
What is a market?
Any arrangement that allows buyers and sellers to conduct business with one another.
What determines the price of a product in the marketplace?
The interaction of demand for and supply of a product.
What is the law of demand?
The higher the price, the lower the demand; and the lower the price, the higher the demand.
What is the law of supply?
The higher the price of a good, the greater the quantity supplied.
What is market equilibrium?
A state where the number of buyers and sellers is in balance, allowing anyone who wants to buy or sell a product to do so.
What is gross domestic product (GDP)?
The total market value of all the final goods and services produced in a country over a given period.
What are the three methods to measure GDP?
- Expenditure approach
- Income approach
- Production approach
What does the expenditure approach add up?
Everything that consumers, businesses, and governments spend money on during a certain period.
What is nominal GDP?
The dollar value of all goods and services produced in a given year at prices that prevailed in that same year.
What is real GDP?
A measure that removes the changes in output attributable to inflation, showing true productivity growth.
What factors contribute to gains in productivity?
- Technological advances
- Population growth
- Improvements in training, education, and skills
What are business cycles?
Fluctuations in the economy that include periods of economic expansion followed by periods of economic contraction.
Fill in the blank: Economic growth occurs when an economy is able to produce more _______ over time.
output
True or False: An increase in nominal GDP always indicates a real increase in economic growth.
False
What is long-term economic growth?
The economy tends to move in cycles including periods of economic expansion and contraction.
What are business cycles?
Fluctuations in economic activity that affect the value of investments over time.
What is the average growth of real GDP in Canada since the 1960s?
About 3.4%.
What characterizes an economic expansion?
Increase in real GDP and significant economic growth.
What is a peak in the business cycle?
The top of the cycle between the end of an expansion and the start of a contraction.
What happens during a contraction?
Economic activity declines, leading to negative GDP growth.
What is a trough?
The lowest point of the business cycle, characterized by falling demand and excess capacity.
What does recovery in the business cycle signify?
GDP returns to its previous peak, with renewed consumer spending.
What are economic indicators?
Indicators that provide information on business conditions and current economic activity.
What are leading indicators?
Indicators that tend to peak and trough before the overall economy.
What are coincident indicators?
Indicators that change at the same time and in the same direction as the whole economy.
What are lagging indicators?
Indicators that change after the economy as a whole changes.
What is the definition of a recession?
A contraction lasting at least two consecutive quarters.
What criteria does Statistics Canada use to judge a recession?
Depth, duration, and diffusion of the decline in business activity.
What is the working-age population defined as?
People 15 years of age and older.
What are the two key indicators of the labour market?
- Participation rate
- Unemployment rate
How is the participation rate calculated?
Labour Force / Working Age Population × 100
How is the unemployment rate calculated?
Not Working but Actively Looking for Work / Labour Force × 100
What has been the trend of Canada’s participation rate since the 1960s?
It has increased, primarily due to more women entering the workforce.
What is the relationship between GDP and unemployment during recessionary periods?
Declining GDP corresponds with increased unemployment.
What is a discouraged worker?
A person available to work who has stopped looking for jobs due to poor job prospects.
What is underemployment?
Individuals working part-time or in jobs below their skill level.
What is a typical characteristic of the unemployment rate during an expansion?
The average duration of unemployment is typically shorter.
Fill in the blank: A contraction is characterized by _______.
[a decline in economic activity]
True or False: Stock prices generally begin to rise during the peak of the business cycle.
False.
What are discouraged workers?
Workers available for work who have given up their job search
Discouraged workers are not considered part of the labor force, leading to a lower unemployment rate.
What is underemployment?
Workers who are employed part-time but desire full-time work
Underemployment indicates a loss of productivity as these workers are not fully utilizing their skills.
Name the four general types of unemployment.
- Cyclical unemployment
- Seasonal unemployment
- Frictional unemployment
- Structural unemployment
What is cyclical unemployment?
Unemployment tied to fluctuations in the business cycle
It rises during economic downturns and falls when the economy strengthens.
What characterizes seasonal unemployment?
Unemployment occurring when industries operate only part of the year
Example: farmhands hired only during harvest season.
Define frictional unemployment.
Unemployment resulting from normal labor turnover
It includes individuals entering or leaving the workforce.
What is structural unemployment?
Unemployment due to a mismatch between jobs and skills
It often requires retraining or relocation to find new employment.
What is the natural unemployment rate?
The minimal level of unemployment in a healthy economy
It reflects full employment where all resources are employed.
How do interest rates affect consumer behavior?
Higher interest rates discourage borrowing and encourage saving
This can lead to reduced consumer spending on big-ticket items.
What is the cost of capital?
The cost of borrowing money for investment
It is influenced by current interest rates.
What factors influence interest rates?
- Demand and supply of capital
- Default risk
- Foreign interest rates
- Central bank credibility
- Inflation
True or False: Higher interest rates generally lead to increased business investment.
False
Higher interest rates raise the cost of capital, reducing investment likelihood.
What is the impact of inflation on interest rates?
Expected inflation leads lenders to charge higher interest rates
This compensates for the erosion of purchasing power.
How do expectations affect interest rates?
Optimism can raise stock prices, while pessimism may stall growth
Government policies also influence public expectations.
Fill in the blank: The nominal interest rate is the rate where the effect of _______ has not been removed.
inflation
What is a negative interest rate?
An interest rate below zero
Borrowers may not make interim interest payments, only principal.
What is inflation?
A sustained trend of rising prices across the economy
It erodes the purchasing power of money.
Define the Consumer Price Index (CPI).
A measure that monitors average price changes of a basket of goods
The CPI is commonly used to assess inflation.
How is the inflation rate calculated using CPI?
Inflation Rate = (CPI Current Period - CPI Previous Period) / CPI Previous Period * 100
This formula reflects the percentage change in average prices.
What is the relationship between nominal GDP and real GDP?
Nominal GDP includes inflation effects, while real GDP removes them
This distinction is crucial for understanding economic growth.
What is the Fisher Equation?
A formula to estimate the real interest rate
Real interest rate = Nominal interest rate - Expected inflation rate.
What is the formula for calculating the inflation rate?
Inflation Rate = (CPI Current Period - CPI Previous Period) / CPI Previous Period * 100
What does CPI stand for?
Consumer Price Index
What does Statistics Canada monitor to measure inflation?
The retail price of a fictional basket of 600 different goods and services
What is demand-pull inflation?
Inflation caused by higher consumer demand than the economy can produce
What is cost-push inflation?
Inflation caused by rising costs of production, leading businesses to raise prices
True or False: Disinflation refers to a sustained fall in prices.
False
What is deflation?
A sustained fall in prices where the annual change in the CPI is negative
What is the Phillips curve?
It describes the inverse relationship between inflation and unemployment
What are the two main components of the balance of payments?
- Current account
- Capital and financial account
What does the current account record?
The import and export of goods and services between Canadians and foreigners
What is a current account deficit?
When a country buys more goods and services from abroad than it sells
What is the exchange rate?
The current price of one currency in terms of another
What happens when the Canadian dollar appreciates?
Canadian exports become more expensive in foreign markets
What is stagflation?
A combination of high inflation and slowing economic growth
Fill in the blank: Hyperinflation is defined as an inflation rate greater than _______ per month.
50%
What are some factors that influence exchange rates?
- Commodities
- Inflation
- Interest rates
- Trade
What is the effect of higher domestic interest rates on the exchange rate?
They attract capital and lift the exchange rate
True or False: The Bank of Canada always intervenes to support the Canadian dollar.
False
What was Canada’s inflation rate high in 1981?
12.2%
What is the significance of the year 2007 for the Canadian dollar?
The Canadian dollar traded above par (US$1.00) for the first time since the mid-1970s
What is the relationship between inflation and the standard of living?
Inflation can erode the standard of living, especially for those on fixed incomes
What are the consequences of deflation for businesses?
Declining profits, cutbacks on production, wage rates, and potential layoffs
What is the primary concern regarding stagflation?
The combination of high inflation and slow economic growth
What effect do higher domestic interest rates have on capital attraction?
Higher domestic interest rates increase the return to lenders relative to other countries, attracting capital and lifting the exchange rate.
What happens to the exchange rate when domestic inflation is much higher alongside higher interest rates?
The impact of higher interest rates is reduced.
How does exporting goods and services affect the demand for Canadian dollars?
Exporting increases the demand for Canadian dollars as other countries must buy them to pay for the goods.
What is the effect of importing goods on the value of Canadian dollars?
Importing increases the supply of Canadian dollars, causing downward pressure on the value of the currency.
Why might a strongly growing economy attract foreign investors?
It improves investment returns and attracts investment capital.
How do large public-sector debts and deficits affect a country’s attractiveness to foreign investors?
Countries with large public-sector debts and deficits are less attractive to foreign investors.
What is the relationship between political stability and foreign investment?
Investors prefer to invest in countries with stable governments; political turmoil can lead to a loss of confidence in the currency.
What is meant by ‘flight to quality’ in the context of political instability?
A rush to exchange the country’s currency to that of more politically stable countries.
Fill in the blank: When we import goods, we must sell Canadian dollars and buy the currency of the country we are _______.
[importing from]
