Chapter 6 – Determination of National Income

“Canadian dollar tops 89 cents US”
Source: www.cbc.ca


On Friday April 20, the Canadian dollar closed just slightly above 89 cents US as commodities strengthened. The rise of the Canadian dollar is up two-fifths of a cent, which is the highest level in five months. According to Statistics Canada, the national workforce increased by 50,000 workers in March compared to an increase of only 24,500 in February. The increase was more than double the predicted amount of 22,000. The unemployment rate dropped to the lowest since 1974, and the Canadian dollar rose most significantly.

Currently one American dollar buys $1.125 Canadian. Bank of Canada Deputy, Pierre Duguay, expects a raise in interest rate at least more time this year to prevent over-inflation. It is said that the labour market is getting too tight so the Bank of Canada may be forced to raise the interest rates so that inflation will not occur as high. Since the beginning of the year, the interest rate has already been increased five times to 4.25%. It is expected that the rate will go well beyond 4.25% if the current trends continue in Canada.

Relation to aggregate demand and supply, full-employment rate of GDP

I believe that it is a positive thing that our economy is experiencing this boom. Canada is making more use of its resources especially with the increase of the Canadian dollar and a decrease in the unemployment rate. As these trends continue, it seems that we are nearing the level of full-employment GDP, though the true definition by the book cannot be reached in reality.

Full employment will cause the current dollar value of GDP to go up and inflation may occur. The reduction in aggregate demand would be necessary to reduce the level of aggregate demand and still maintain full employment (known as the inflationary gap). However, Canada’s possible inflationary gap could be eliminated through a reduction in spending or an increase in taxes. I think that one solution the government can do is increase the interest rate of borrowing. However, if interest rates are raised too high, foreign investment may be encouraged and our Canadian dollar with GDP may decrease. It will be interesting to see how the federal government will intervene economically in effort of stabilizing its economy.

Chapter 5 – Economic Indicators

“Gas ignites inflation's rise”
Source: The Vancouver Sun

Canada’s annual inflation rate increased sharply last month according to Statistics Canada. This result is mainly because of the high gasoline prices and rising housing costs. The rate increased by 2.0 per cent from last year. This is the biggest one-month gain since Hurricane Katrina struck in September 2005. The main inflation jump is blamed mostly on the increase of gasoline prices. In British Columbia, gas prices at the pump increased by 9.2 per cent between January and February of this year. The 2.0 per cent inflation increase over the year “contributed to the increase of mortgage and homeowner’s replacement costs,” said Statistics Canada. Mortgage interest costs rose by 5.3 per cent, which was the fastest increase since February 2001. Homeowner’s replacement cost matured to 7.1 per cent, after following another 7.6 per cent increase in January. The average prices of goods and services increased in all 10 provinces, however they rose faster than the normal average between February 2006 and 2007.


Relation to Chapter 5 – Inflation


The general level of retail prices increasing is a certain sign that we are facing inflation. To more extreme cases, the result in prices of goods and services may become higher and higher and eventually become out of control. In my opinion, I see inflation as a negative thing for many citizens in British Columbia. Most of all, price increases hurt people on fixed incomes, for example pensioners, who have no other source of acquiring income. As price and services increases, the purchasing power of Canadian dollars become less and less. Citizens will have a rough time dealing with the fact that what they purchase now will increase significantly later on.


The prices of products may rise so greatly that may ultimately be unaffordable since most of many citizen’s income already go towards the necessities in live or at least in Canada. Inflation can obstruct Canada’s position in world markets if products created domestically become too expensive and foreign buyers seek different suppliers. In addition, high inflation rates will affect small business because of the possible increasing interest rates of bank loans. Employees will start to demand increase in wages to keep up with the cost of living, which would most likely drive businesses down to bankruptcy.


All in all, I feel that any increase to the inflation rate will create many problems and uncertainties in the future. Buying habits will alter drastically, which may lead Canada into a depression. I think that households and businesses should purchase goods, like houses, that speculate prices to rise in effort to protect themselves from rising prices.

Chapter 4 – Government in Canada

“B.C. offers tax cut in provincial budget”
Source: ctv.ca

British Columbia reported huge plans in improving housing, cutting tax and cleaning up the environment. Finance Minister, Carole Taylor promises housing improvements worth $2 billion over the next for years for everybody from homeless to homeowners. For the first time in 15 years, welfare rates will increase. Shelters rates for people on welfare will increase by $50 per month and the same for single parents. Nine hundred shelter beds will be added to BC’s drop-in shelters. Most of the budget focuses on “helping people of British Columbia meet their housing commitments,” says Taylor. First time home buyers will have an increased threshold of $375, 000. Additionally, BC taxpayers earning up to $108, 000 a year will get a 10% personal income tax cut. This 10% tax cut combined with the 25% personal income tax cut introduced by the Liberals in 2001 makes British Columbia the lowest provincial income taxes in Canada. It is expected that the provincial government will have a $3.2 billion surplus for next year’s budget and an economic growth of 3.1%. Major funding will be allocated next year in effort to reduce greenhouse emissions. The government is planning to implement a surcharge on hydro rates this year as part of the energy plan.

Relation to Chapter 4 – growth of government spending, net debt

Personally, I am pleased to hear that the majority people of British Columbia will benefit from the 10% personal income tax cut since an enormous percentage of people earn less than $108, 000 in BC. In addition, the increase of spending in welfare programs to the already 17% of government spending will contribute greatly to low-income families or individuals. British Columbia receives 70% of their revenue from taxes, mainly from personal income taxes. How will British Columbia gain any revenue if their main source is cut substantially by 10%? Ultimately, British Columbia is increasing their government spending while decreasing their revenue. This occurrence will contribute greatly in adding to the province’s net debt, which is already $37 million, which forecasts to rise to $40 billion by 2010. In my opinion, I think the provincial government should have used 50% of its surplus towards debt reduction. Although this proposal benefits me, I thought the government should have raised their welfare rates a lot more and spend more money to house the poor rather than tax cutting high-income earners. This system would involve more spending towards welfare programs, however on the other hand; the government’s main revenue (income tax) will not be altered.

Chapter 3 – The Role of Government in Market Economy

“Harper pledges $1.5 billion for green energy”
Source: www.ctv.ca, January 18 2007

It has been reported that the Conservative government will spend $1.5 billion in the span of 10 years. The $1.5 billion will be invested to help improve Canada’s supplies of wind, tidal, biomass and green house energy. Stephan Harper announced the report on Friday that their investment will boost the amount of renewable energy to 4,000 megawatts a year. It is speculated that this long-term project will be comparable to taking one million cars off the road, in terms of greenhouse gas reductions. The purpose of the government’s large budget towards green energy is aimed towards cleaner air, lower greenhouse gas emissions, and brighter future for a greener and healthier Canada. Remarkably, the federal government expects to add enough clean renewable electricity for up to one million homes. Furthermore, the second part of the program, about $35 million, will be used towards industries to, “increase the adoption of clean renewable thermal technologies,” the government said. This announcement by the government was an addition to the $230 million plan towards research on clean technologies last Wednesday.

Relation to Chapter 3 – Government involvement in the environment, positive and negative third party effect

It appears as though global warming is becoming a huge issue and that the federal government is finally taking initiative by aiming for a greener and healthier Canada. If plans are carried out, the government’s involvement in the environment will be truly beneficial to the nation because if it was a free market, people will only care for themselves and not for the environment.

There are positive third-party effects, which will be beneficial now and in the future. The amount of harmful wastes and CO2 gas emissions to the earth will drastically be limited. Rising sea levels, altered patterns of agriculture and extreme weather conditions will also be less of a risk in the future. Since the government is funding so much money, manufacturers will start to create much more environmental friendly products that will not damage ecosystems. It is possible that the government may stop imposing excise taxes on products like air conditioners in automobiles that damage the environment (as described in the textbook) because a solution may be discovered from the green energy project.

Although the positive third-party effects are valid and strong for the reason that it benefits our health, there are still negative third-party effects. It is possible that the cost of living will increase since the prices of products; services and necessities will also increase for the reason that it usually costs more to enhance things. For example, hybrid cars are far more environmental friendly than normal cars but they are also more expensive. Due to increased costs, the government will cause the supply curve for most things to shift to the left.

In my opinion, I personally believe that the positive third-party effects will strongly benefit us and that the negative third-party effects are not as significant. It is about time the government set a side our tax dollars in effort to create a greener and healthier earth for us to live in. There is no point of ignoring the fact of global warming and spending money on other things if we are going to be swept away in a tsunami or boil to death.

Chapter 2 - The Operation of a Market

“Houses starts to move lower in 2007:CMHC”
Source: http://www.canada.com/, November 2, 2006

The article’s main idea is about how the demand for houses is going to slow down, even in Alberta and BC, and therefore the constructions of houses in Canada is going to decrease in the next year. It is expected that the demand for houses will continue to decrease over the rest of the decade. The Canada Mortgage Housing Corporation predicted that Manitoba will be the only province where construction is expected to increase from 2008-2010. This year, BC and Alberta will boost the average selling price of a home up 11.5% in 2005 to $278,100. However, it is expected that next year, the increase in prices will only be half of this year’s increase. Increase in homes for sale combined with slower sales will balance the housing market.


Relation to Chapter 2 – The market of houses, supply and demand and elasticity


Due to the high demands of home ownership, in the past, the market was able to raise their prices. The demand of home ownership was represented by the limited quantity of housing. In a response to the popular demand the housing market began to flourish. As the demand for houses increased, the price of houses also increased. The low mortgage rates, or the complementary product, increases in population and the taste in preferences were the result of the record sales in new and existing hones.


However now, it seems as though, people realize that they are not able to purchase the houses anymore because of the price increases. This is when people start considering the alternatives or substitutes to houses such as apartments, condos, townhouses, duplexes and rentals, and therefore houses are elastic. I believe that as time wares off, the increase in supply of houses with the struggle to sell at high prices will bring more of a balance to the housing market or, in other words, back to an equilibrium price where it is considered to be affordable.

In my opinion, I believe that only time will tell if the prices of the housing market will fluctuate or not. As more and more substitutes of houses are available, people may adjust their buying patterns especially if there are changes in the price of substitute products. Since apartments, townhouses, etcetera are close substitutes for houses, the increase in price of homes will likely influence the demand for the substitutes.

Chapter 1 – Introductory Concepts

“Western job boom drops unemployment”
Cnews, November 4, 2006

This article explains how Canada’s unemployment slipped to 6.2% for October compared to last months 6.4% due to the growth of western Canadian oil, gas and minerals boom. The economy recorded a net gain of 51,000 jobs, 23,000 of them in Alberta alone for the month of October. The increase was twice of what analysts had predicted. While the West is prospering from the energy and mineral sectors, manufacturing, especially in Ontario and Quebec, are continuing to weaken. The high dollar and slumping markets led to cuts in the automotive, industrial and forestry industries. In a result, 15,000 factory job workers were laid off, making the total losses for the year to 83,000. However, Ontario and Quebec are still able to sustain their economy by finding new jobs in service industries. “The most important part of these figures is that the Canadian economy continues to create jobs, although it is an uneven performance across sectors and across provinces,” said Aron Gampel.


Relation to Chapter 1 – Scarcity, labour and land (resources)


It appears that the amounts of labour resources are be coming quite scarce in Western Canada. Consequently, the reason for Western Canada’s economic boom is greatly from the abundance and demand of their land resources (oil, gas, minerals). As more and more land resources are used, the nearer the resources will deplete and become scarce.


However, we must consider what does the future hold for Western provinces when the non-renewable resources are gone? What happens if Western Canada loses the demand of their resources? It is likely that as land resources run out, the amount of labour opportunities will decrease in Western Canada, especially in the energy, mineral, manufacturing industries. This is why us, Western Canadians, should really consider other ways for our economy to prosper instead of constantly selling our scarce resources. We need to find new ways to sustain our economy by finding new jobs in other industries, perhaps in services. In other words, in the near future, the amount of Western jobs available may decrease as our major dependent of non-renewable resources depreciate. If this occurs, Western Canadians may consider moving to prosperous countries that demand workers just as how Western Canada once did.


Therefore, in my opinion, I fully agree that economics is the study of how we make decisions regarding the use of our scare resources. As resources gradually become scarce, Western Canada’s future economy still remains a huge question mark that must be considered before it’s too little, too late. It may be possible that in the upcoming years that Alberta and British Columbia may experience a slumping economy just like Eastern Canada.