1 ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich

2 Lecture 2: January 8 Ch. 1, 13

3 Firms Collection of people working as team Existence of firms –Why do they exist? –What does a “firm” maximize? –Who makes the key decisions and why? Separation of ownership and control Risk taking –How is accountability managed within the firm? –How are they/how should they be organized? –Limits on risk taking – creditors, regulators, reputation

4 National Income Accounting GDP: Y = C + I + G + EX – IM Current account (CU): EX – IM –Y – C – G = CU + I Nominal GDP in Canada, 2012: $1,820 billion –Consumption (C): $987 billion (54%) –Investment (I): $360 billion (20%) –Government (G): $472 billion (26%) –Exports (EX): $547 (30%) –Imports (IM): $583 billion (32%) Investment spending the smallest of the five major categories, it is also generally the most volatile. Changes in business investment spending tend to be the major driver behind changes in aggregate demand and GDP

Canada in the Global Economy, 2012 GDP (US$ B) 5

6 World$71,666 1U.S.15,685 2China8,227 3Japan5,960 4Germany3,400 5France2,613 6U.K.2,435 7Brazil2,253 8Russia2,015 9Italy2,013 10India1,842 11Canada1,821 12Australia1,521

7 13Spain1,349 14Mexico1,177 15South Korea1,130 16Indonesia878 17Turkey789 18Netherlands772 19Switzerland632 20Saudi Arabia590 21Sweden526 22Norway500 23Poland490 24Belgium484 25Argentina475 Top 2559,577

8 Macroeconomics Top 10: $46,443 (65%) Top 25: $59,577 (83%) EU: 26% –Portugal: $212 –Italy: $2,013 –Ireland: $210 –Greece: $249 –Spain: $1,349 –PIIGS: $4,123 (6%) US: 22% Canada: 2.5% Brazil, Russia, India, China: $14,300 (20%)

Canada in the Global Economy, 2012 GNP per Capita (US$) 9

10 1Norway98,860 2Switzerland80,970 3Qatar76,010 4Luxembourg71,620 5Denmark59,850 6Australia59,360 7Sweden55,970 8Macao55,720 9US52,430 10Canada50,970 11Netherlands47,970 12Japan47,880 13Austria47,660 14Singapore47,210

11 15Finland46,490 16Kuwait45,000 17Belgium44,660 18Germany44,260 19France41,750 20Ireland39,110 21UK38,670 22Iceland38,330 23Hong Kong36,560 24UAE.35,770 Brazil11,630 Russia12,700 China5,720 India1,580

12 National Income Accounting Savings: –Private savings: SP = Y – T + TR – C Taxes: income, sales, health tax, “vice” taxes, carbon Transfer payments: old age pension, employment insurance, workers’ compensation, social assistance, subsidies –Government savings: SG = T – TR – G Federal + provincial + municipal budget balances –Total savings: SP + SG = Y – C - G

13 Savings SP –Deleveraging –Paradox of thrift –Relativism and savings SG –Fiscal stimulus in U.S., Canada, EU, Japan –Financing deficits – implications for interest rates, exchange rates, SP Traditional model –Is there a debt wall? Consider case of Greece, US, California

14 Savings and the Current Account S = SP + SG = Y – C – G = I + CU –S > 0  I + CU > 0 –Building up capital stock and/or acquiring foreign wealth (assets) –S < 0  I + CU < 0 –Building up foreign debt to finance investment, current consumption or government spending CU = SP – I + SG –If SG , CU also may  (if SP and I do not change) –Twin deficits: CU < 0 and SG < 0

15 Balance of Payments Transactions resulting in payments to foreigners (conversion of C $ into foreign currencies) enters B. of P. as debit (-ve): purchase/import of goods, services, assets Transactions resulting in receipts from foreigners (conversion of foreign currencies into C$) enters as credit (+ve): sale/export of goods, services, assets

16 Balance of Payments Current Account: transactions involving goods/services –Merchandise trade –Services: tourism, transportation, financial services, business services, investment income –Sum of all current accounts across all countries = 0 U.S. and ROW –Statistical discrepancies – not all transactions captured (smuggling)

Canada’s Current Account (C$ B) GOODS Exports Imports Balance SERVICES Exports Imports Balance INVESTMENT INCOME Exports Imports Balance Total Balance

15 Largest Exporters, 2012 (US$ B) China2,080 US2,061 Germany1,625 Japan965 Netherlands795 France763 UK747 South Korea649 Italy628 Hong Kong577 Russia575 Belgium564 Singapore539 Canada527 Spain449 World22,425 18

Exporters Other notable countries –India $442 B –Brazil: $293 B –U.A.E.: $297 B –Mexico: $365 B –Taipei: $354 B 19

15 Largest Importers, 2012 (US$ B) U.S.2,661 China1,980 Germany1,543 Japan1,021 France857 U.K.808 Netherlands717 Italy671 Hong Kong667 South Korea622 India587 Canada563 Belgium546 Singapore480 Spain467 World22,293 20

10 Largest Current Account Surplus Countries, 2012 (US $ B) Germany$239 China193 Saudi Arabia165 Kuwait79 Netherlands78 Norway72 Russia71 Switzerland64 Qatar62 Japan61 21

10 Largest Current Account Deficit Countries, 2012 (US $ B) U.S.$440 UK95 India92 Canada62 France57 Australia57 Brazil54 Turkey48 Indonesia24 South Africa24 22