Lecture 2 - Canadian Economy: Key Concepts

• Lecture 2 is about the Canadian economic environment

Canada And Its Economic System

• Canada is a member of the G7/8.
• G7 represents an intergovernmental organization of seven of the world's most developed economies.
• Members of G7 are US, Japan, Germany, Great Britain, France, Italy and Canada.
• G7 countries address global issues like economic policy, international security, and climate change.
• The G7 summit for this year took place in Italy, and the next one will be in Canada (Alberta).
• The G7 is unable to pass laws but some of their decisions have had global effects.
• Canada has one of the most developed and diversified economic systems in the world.
• Canada's economy is mixed, blending private enterprise with government regulation and intervention and fosters both market-driven activities and government intervention in sectors like healthcare and education.
• Canada has abundant natural resources, skilled labor, and sophisticated technology.
• Canada has moved from being primarily agricultural to a diversified system.
• Canada has a trading relationship with the United States.
• In 2019, the US accounted for 73% of Canada's external trade volume and 50% of their import volume.
• Products driving trade performance are oil and gas, canola, wheat, gold, nickel, potash, sulfur, telecommunications, aerospace, forestry, and automotive products.
• Productivity gains, business investments, technological advancements, wage growth, and a favorable exchange rate ensure resilience and competitive advantage.
• Economic stability and growth depends on supporting and enhancing economic activities.

Contributing Factors to Economic Development

• A stable political system is important.
• Necessary for production and efficient development are roads, ports, utility systems, educated workforce, and tech-based business management systems.
• National and provincial debt levels must be within acceptable limits.
• Canada's banking system ranked first in G7 and one of the soundest in the world (2018-2019)
• Well-managed inflation levels are important
• There must be a strong, fair and equitable legal system
• Low levels of corruption are important in both public and private sectors.
• Foreign Domestic Investment (FDI) is an important factor.
• Comparative advantage in the commodities and energy market sector.

Inflation Levels

• Canada's usually well-managed inflation levels is maintained by The Bank of Canada, by keeping inflation around 2%, for price stability and economic growth
• As of January 2024, the annual inflation rate fell to 2.9%, the lowest since June of the previous year, because of decreases in transportation and food prices. However, in May 2024, inflation saw an uptick due to higher prices for travel and groceries.
• The Bank of Canada projects inflation to hover around 3% in the first half of 2024 before easing below 2.5% in the latter half of the year, with the goal to return to the 2% target by 2025.

Foreign Direct Investment (FDI)

• FDI involves a country's company investing in a business or project in another country.
• Canada received USD 52.6 billion in FDI in 2022, according to UNCTAD's 2023 World Investment Report.
• Canada's largest trading partner is the U.S.
• Canada is seen as a safe and lucrative business environment
• Canada’s strengths include easy business start-up and credit access, a skilled workforce, good infrastructure, and abundant energy and mineral resources, plus a strong banking sector.
• Europe and Asia/Oceania actively invest in Canada

Canada: Mixed Economic System

• Canadian policy allows markets to operate without intervention,
• Canada allows market equilibrium through prices and quantities of goods and services, for economically efficient output.
• Canada has competition legislation to avoid markets operating without intervention.
• Markets are used to promote private enterprise, personal ownership, and entrepreneurship
• The government has different roles in the Canadian economy ranging from regulator to manager.
• The government acts through a cooperative/competitive mode, to benefit the market as a whole.

The Underlying Economic Model

• 3 Fundamental principles influence a mixed economic system:
• Law of supply and demand.
• Allowance for private ownership, entrepreneurship, and wealth creation.
• Extent of government influence in economic activity and direction.

Law of Supply and Demand

• Fundamental economic principle illustrating how a product or service's market price is determined independently of external factors.
• The price of a product is dependent on the interaction between demand and supply components of a market
• Demand constitutes the willingness of consumers and producers to engage in buying and selling.
• Elastic and inelastic demand
• Market equilibrium leads to a creation of stable price.

Market Equilibrium

• Buyers and sellers will exchange quantity Q for price P
• Supply and demand are in balance here
• Price determination depends equally on demand and supply
• Market price is just an outcome

Government Involvement In Influencing Economic Activity and Direction

• Multiple are played by the government
• Fully Open System, Mixed Economic System, & Controlled or Planned System

Government Involvement

• The Canadian government actively participates in the economy.
• The Canadian government regulates industries for competition, labor rights, and consumer safety
• Canada has a robust safety net, with government-provided services in healthcare, education and welfare programs.
• The Canadian government owns and operates key industries through Crown corporations.
• The Crown corporations include Canada Post, CBC and Via Rail.

Allowance for Private Ownership, Entreprenuership, and Wealth Creation

• Private enterprise includes personal ownership, entrepreneurship and wealth creation.
• Developing economies such as China and India are allowing greater access to these capitalistic principles, while others like North Korea, are not.

Private Ownership, Entreprenuership, and Wealth Creation

• Canadian economic system allows individuals to create wealth within a market-driven environment
• Individuals and businesses have right to own property, assets, and businesses
• There are support systems in place for small businesses and startups, such as Futurpreneur Canada and the Canada Small Business Financing Program (CSBFP).
• Investment and growth are encouraged through favorable corporate tax rates, capital gains taxation, and tax incentives for innovation and research.

The Economy In Simple Terms

• Four interdependent factors support economic activity: expenditures, savings, investment, and credit.
• Economic Activity = Expenditures + Savings + Investment + Credit
• They are interconnected
• Expenditure can lead to increased savings, while accessible credit can boost spending and investment

Economic Growth Cycle

• Total value of a nation's economy as measured by gross domestic product.
• Gross Domestic Product (GDP) the market value of all goods and services a nation produces domestically over a year.
• GDP includes goods/services produced and purchased in the country for consumption, business investments, goods produced for export, and government spending.
• Recession is two or more consecutive quarters of decline in GDP

Economic Contraction Factors

• Employment Contraction
• Real Wage Concessions or Stagnation leads to Purchasing Power Stagnation or Reduction (depending on inflation)
• Decreased Consumer Spending
• Decreased Corporate Profits and Governmental Tax Revenues
• Decreased Capital Spending and Government Expenditures

Managing The Movement In The Economy

• Stimulates investments and maintains control of inflation.
• Inflation is the rate of increase in price over a given period.
• Inflation measures how much more expensive a set of goods/services becomes.
• A growth that is taking place needs to be real and not masked by inflation.

Economic Regions in Canada

• Geographic Canada's economic clusters leads to disparity in the growth rates and economic potential
• Energy prices impact NLFD and Labrador
• B.C., ONT, and QUE should see growth after NAFTA renegotiations (USMCA)
• Economic growth lags behind for the Maritime provinces.

Trends Impacting The Canadian Market

• Inflation
• Consumer debt loads
• Geographic clustering and economic imbalance
• Currency exchange rate impact
• Branch market impact
• Sustainability and green initiatives
• Managing the Movement in the Economy
• All of the above trends need to be watched in order for businesses to operate strategically to meet Canadian demands

Explore Canada's economic system, resilience, and global trade. Key topics include the role of the G7, GDP, and factors influencing economic stability. Questions cover Canada's economic transition and trade performance.