Chapter 6
“Strong Demand driving economic growth, could mean higher interest rates”- Canadian Press, April 27, Sandra Cordon
http://www.canada.com/ottawacitizen/news/story.html?id=ef61a5ed-f503-476c-b766-dbb654621374&k=4363&p=2 SummaryIt was reported by the Bank of Canada that strong demand in Canadian resources and domestic good has caused gross domestic product to increase, and higher interest rates might be the solution to keep inflation down. It is expected that the GDP growth will be 3% (as compared to 2.9% in a previous prediction) for 2007 and 2.9% for 2008. The forecasted growth is even more in the United States which leads to higher demand for Canadian exports. The central bank is debating whether to increase interest rates at least one more time to off-set inflation. Balancing inflation is not an easy task especially when high energy prices can create volatility in inflation rate. Due to the strong Canadian dollar, high and volatile energy costs are off-set by reduced price of imported goods. Also, government’s plan to cut GST by 1% will help decrease inflation. Globally, the growth averages to 4.8% because of amazing growth in China and in other parts of Asia. Housing investment also increases, which is surprising; despite the increase in interest rate.
Relationship and ReflectionWhen inflation increases, one way to counter-balance it is to raise the interest rate. The decision on whether or not to invest often depends on the cost of borrowing. If borrowing costs (interest rates) are high, then investment spending will be reduced. Some equipment purchase that is regarded as marginally profitable will be abandoned. When interest rates are high, households are encouraged to save money because the return they get for leaving money in the bank or other financial institutions are also high.
Manipulating interest rates is a good strategy to off-set GDP increases and inflation since spending is sensitive to changes in interest rates. Furthermore, the decreases in investment and consumption have a multiplier effect on the GDP level. This multiplier effect also applies to changes in government tax. Therefore the 1% GST cut mentioned above will also have a rather significant impact on GDP.
Chapter 5“Job growth continues to boom in Jan”- National Post, February 9, 2007, Financial Post
http://www.canada.com/nationalpost/financialpost/story.html?id=e51077e3-ce8c-4cb2-8cff-33fe2394a059&k=25157Summary Based on GDP numbers, Paul Ferley, an assistant chief economist with BMO Capital Markets, concluded that Canada has a very perplexing puzzle at hand. The lack of GDP growth in relation to the amplified hiring rates conflict with each other. In Canada, it seems as though we have found a job for nearly everyone, but have no economic output to show it. A record high of 63.4% of people employed was reported in January. This was due to an 89,0000 increase of people employed. Even the previous month had experienced high employment numbers of 52,000 new employees.
All of these increases in employment are mostly credited to the economical strength of British Columbia and Alberta. In contrast to the increase in employment, our economic out-put experienced a small growth of 0.2 %. Economist predicted that the next quarter’s growth would be less than 1.0 %, which is quite a bit lower than what the Bank of Canada’s forecast of 1.5 %. According to David Wolf, a Canadian economist, the confusing conundrum is a result of a weak labour market, a productivity level that is “absolutely terrible”, faulty growth readings, or a combination of any of the three. A task force was set up last week to investigate this matter further. They are expected to wield results in the next month. It looks as though the Canadian economy has stalled in motion for the time being.
Relationship and ReflectionIn this chapter, we learned that GDP is usually a great indicator that reflects the standard of living in Canada. An increase in GDP would represent an increase of goods and services produced, which in return contributes to Canadian incomes rising. When GDP is expected to decline, or slow down, many business cut costs, and in most situations, they cut back on employee expenditures. In this case, it is an obvious contradiction to this rubric. In our economy, GDP and employment are tightly knitted. As GDP falls, so does employment. However, job growth Canadians experienced this January proves that this is not the case. Regardless of the confusion, there could be many reasons for this occurrence. Although there has been an employment growth throughout the country, the two western provinces has out-shined the rest of them. Alberta recently experienced an oil boom, which could have masked the data. Because of the oil boom, Alberta wages were not affected by the import prices, but grew instead. They were also in need of labour, so they hired young people with little education who weren’t that productive. Other factors that might have lead to the confusion are the difficulty in measuring out-put or productivity, especially in certain sectors such as health care and education. The new employment levels are not likely to be sustained as the GDP growth is slowing.
Chapter 4“GVRD to ponder tolls, fees on drivers”- The Province, February 22, 2007, Frank Luba and Jack Keating
http://www.canada.com/theprovince/news/story.html?id=3110a796-7ccc-4363-8281-436a0bbcb44e&k=66306&p=2SummaryThe Greater Vancouver Regional District is considering “road pricing” i.e. imposing tolls on motorists in the Lower Mainland for the usage of roads and bridges. The public policy objectives associated with the aforementioned taxation are to reduce greenhouse emissions and cutting down on traffic congestions. The suggestions include tolls on roads and bridges, and paying for the distance travelled. In London, England, drivers pay a toll of almost $20 per day to drive to Downtown. Drivers are not particularly pleased with the idea though. This does not come as a surprise because extra cost will be imposed in addition to fuel taxes, licensing, insurance, gas and parking. Some drivers even said that they would limit their choices of destination if the suggestion does come into effect. Other drivers said they would resolve to public transit. It is quite clear that the majority of the residents would oppose it as this will create a burden on their budgets.
Relationship and ReflectionThis is a typical taxation policy by the GVRD to fulfill two economic objectives. One is to reduce greenhouse effects which are believed to be a cause for global warming. The other objective is to look for ways to control traffic congestion. “Road pricing” sounds like a very direct approach to solve the problem. In this situation, the government hopes to influence potential motorists by discouraging them to drive. This can be achieved through introducing a toll fee. Here is an example of the benefits-received approach to taxation. This approach proposes that individuals be taxed on the basis on the benefits they received from the government. This is also an example of a direct tax which is one imposed on the individual who should pay the tax.
The collection of toll has been practiced by many countries even though it might not be easily acceptable at the beginning. Theoretically, it should solve the problem of pollution and traffic congestion in addition to generating revenue for the government. However, it might create financial burden on citizens, especially middle class families. Nevertheless our dependency on private transportation leads us to believe that toll collection might be the only way to cut down pollution and traffic.
Chapter 3“Tories five tax credit to energy efficient homes"- The Province, January 21, 2007 Canadian Press
http://www.canada.com/theprovince/story.html?id=7646aadf-e73e-41c9-b75b-89c1e58b14e7&k=16962SummaryIn order to reduce the effect of green house gas emissions, the Conservatives will pay back up to $5,000 to homeowners who make their homes more energy efficient. This will allow all home owners to do their shares in cutting their energy use. The process to install tools like programmable thermostats and increased insulation will benefit about 800 small businesses. This is the final plank of the Conservative’s green energy plan. Environmentalist doubt if this program will have a large impact in the country’s greenhouse gas emissions. World Wildlife Federation director commented that it will take much more ambition than what the Conservatives are showing. The target for this program is 140,000 over 4 years but up to 2 million homes need to be updated. Liberal’s new environment critic said the government had no intention to require and audit after renovations are complete to ensure that people deserve their rebate. Political science professor at McMaster University believed that this latest announcement is designed to improve party support by sending people cheques while Toronto Mayor said that a lot more can be done to address climate change.
Relationship and ReflectionIn a market economy, most economic decisions are made by individual buyers and sellers. However, economists identify six major functions of government’s in market economies. Governments provide the legal and social framework, maintain competition, provide public goods and services, and redistribute income, correct for externalities, and stabilize the economy. The above article is a classic example of pollution that is released into the air with no individual owners holding liable, and there are few economic incentives for most people to do so. Government’s role in this situation is to try to correct this imbalance. By intervening, the government can provide monetary motivation for people to help reduce pollution. This action by the government also creates a Third Party Effect by providing businesses to owners for installing tools to increase insulation.
Unfortunately, it is usually difficult and costly to determine the precise source of solution or exactly how much the pollution is actually costing society. Because of these difficulties, the government must be sure that it doesn’t impose more cost to reduce pollution than the pollution is costing society in the first place. To do so would clearly be inefficient. In most cases, the role of government is to improve the functioning of the market economy.
Chapter 2“Houses Market still Cooling: analysts”- The Province, November 9, 2006 Can West News Service
http://www.canada.com/theprovince/news/story.html?id=87855260-c921-48ae-ba23-193352f1d347&k=79332SummaryAccording to an article “Housing Market still Cooling: analysts” in The Province, the housing market is slowing down even though there was an unexpected increase in housing construction in October. The US housing market has gone down by almost 15% and the Canadian housing market is expected to follow. The main reason is because growth in incomes for Canadians is not able to support the current home prices. House prices are increasing more rapidly than disposable incomes. Higher interest rate is another factor in determining the housing market. The pace of home sales will decline gradually overtime, with Toronto and Calgary showing some signs already. In the last year, sales in Calgary fell 17.7%, while Toronto sales dipped 4.2%. Last month, the pace in construction in urban areas was up by 28.2% in Quebec, 10% in British Columbia and 9.7% in Ontario, however there was a 6.4% drop in the Prairie provinces and 15.7% in the Atlantic region.
Relationship and Reflection
The determination of prices housing markets is an example of microeconomics. We are seeing the interaction between buyer and seller with prices being offered and agreed before a final transaction is made. The demand and supply are factors that determine the value of properties in a market.
When the market demand for houses is high and when there is a shortage of properties then the balance of power in the market shifts towards the seller. This is because there is likely to be greater demand in the market for good properties. Sellers can wait for offers on their property to reach (or exceed) their minimum selling price. When demand for housing is low and when there is an excess of properties available on the market, then the power switches to the potential buyers. They have a much wider choice of housing available and they should be able to negotiate a price that is lower than the published price. When the demand for houses increases, there is upward pressure on market prices.
Often the supply of available housing in the market is relatively inelastic because there are time lags between a change in price and an increase in the supply of new properties. When demand shifts outwards and supply is inelastic the result is a large rise in market price and a relatively small expansion of the quantity of houses traded. As supply becomes more elastic over time, we expect to see downward pressure on prices and a further increase in the equilibrium quantity of houses bought and sold.
Chapter 1"Oil Prices Rise"- The Globe and Mail, November 9, 2006 Associated Press
http://www.theglobeandmail.com/servlet/story/RTGAM.20061109.woil09/BNStory/Business/homeSummaryAccording to an article "Oil Prices Rise" in The Globe and Mail, prices are holding steady at $58-$68 a barrel for the time being, but this is going to change. It is expected that oil prices will increase when the winter seasons arrive due to an increase in demand on fuel. The increase in price is also due to uncertainty in change in US leadership. The midterm elections resulted in the democrats in full control over the House of Representatives and Senate. Correspondingly, there will be changes in US energy policy. OPEC (Organization of Petroleum Exporting Countries) ministers also intend to cut oil production. They planned to reduce oil out-put by 1.2 million barrels a day beginning November 1. Another production cut may follow in December. The weather also predicted a colder than normal winter. Qatar’s oil minister is certain that OPEC members will live up to their words to cut oil supplies. OPEC president said that low oil prices encourage cuts in out-put. Oil prices went down from $78 a barrel to about $59 in the last five weeks.
Relationship and ReflectionOil has become a scarce resource. We depend heavily on supplies from OPEC countries for oil. It is a finite resource, and the depletion of oil reserves is almost as certain as death. Almost half of the easily-extractable oil has already been used. This scarcity has driven oil prices up. The scarcity of oil is rupturing economy of the world because we are forced to accept any price offered by oil-rich nations or we will have to ration oil in one way or another. Scarcity is not simply a function only of production and supply; it also results in increasing demand, and this is the situation we are facing today. Rising demand has turned oil from a relatively abundant resource to a far scarcer commodity.
