1. 1 ECONOMICS 3150B Fall 2015 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

2. 2 Lecture 2: September 15 Ch. 10, 13

3. 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. 4 National Income Accounting GDP: Y = C + I + G + EX – IM Trade Balance (TB): EX – IM –Y – C – G = TB + I Nominal GDP in Canada, 2014: $1,975 billion –Consumption (C): $1,073 billion (54%) –Investment (I): $467 billion (24%) –Government (G): $491 billion (25%) –Exports (EX): $624 (32%) –Imports (IM): $642 billion (33%) 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

5. Canada in the Global Economy, 2014 GNI (US$ B) Table 4 5

6. 6 World$76,895 1U.S.17,114 2China9,144 3Japan5,900 4Germany3,810 5France2,807 6U.K.2,666 7Brazil2,514 8Italy2,134 9Russia1.982 10India1,953 11Canada1,848 12Australia1,513

7. 7 13Spain1,396 14South Korea1,299 15Mexico1,209 16Indonesia939 17Netherlands858 18Turkey823 19Saudi Arabia759 20Switzerland733 21Argentina605 22Sweden593 23Norway530 24Iran528 25Belgium518 Top 2564,175

8. 8 Macroeconomics Top 10: $50,024 (65%) Top 25: $64,175 (83%) Euro zone: 17% –Greece: $238 (0.3%) US: 22% Canada: 2.4% Brazil, Russia, India, China: $15,593 (20%)

9. Canada in the Global Economy, 2013 GNI per Capita (US$) Table 5 9

10. 10 1Bermuda106,140 2Norway104,260 3Switzerland90,670 4Qatar87,150 5Luxembourg69,880 6Australia65,410 7Sweden61,750 8Denmark61,740 9Kuwait55,470 10Singapore54,580 11US54,070 12Canada52,570 13Netherlands51,060 14Austria50,390

11. 11 15Finland48,910 16Germany47,250 17Iceland46,650 18Belgium46,340 19Japan46,330 20France43,550 21Ireland43,080 22UK41,590 23New Zealand39,300 24Brunei36,710 Brazil11,760 Russia13,210 China7,380 India1,610

12. 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. 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. 14 Savings and the Current Account S = SP + SG = Y – C – G = I + TB –S > 0  I + TB > 0 –Building up capital stock and/or acquiring foreign wealth (assets) –S < 0  I + TB < 0 –Building up foreign debt to finance investment, current consumption or government spending TB = SP – I + SG –If SG , TB also may  (if SP and I do not change) –Twin deficits: TB < 0 and SG < 0

15. 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, factor services, unilateral transfers, assets Transactions resulting in receipts from foreigners (conversion of foreign currencies into C$) enters as credit (+ve): sale/export of goods, services, factor services, unilateral transfers, assets

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

17. Canada’s Current Account (C$ B)1990200020052010 GOODS Exports152.1429.4450.2404.8 Imports141.0362.3387.8413.8 Balance11.167.062.4-9.0 SERVICES Exports22.459.767.671.3 Imports33.065.579.794.0 Balance-10.6-5.8-12.1-22.7 INVESTMENT INCOME Exports17.636.849.861.8 Imports40.269.9172.778.2 Balance-22.6-33.1-22.9-18.1 Total Balance-23.129.325.9-50.9 17

18. 15 Largest Exporters, 2013 (US$ B) Table 6 China2,363 US2,280 Germany1,706 France836 Japan830 UK807 South Korea722 Netherlands668 Italy616 Russia593 Singapore579 Canada555 Switzerland487 India468 Spain457 World22,254 18

19. Exporters Reserves as % of exports –Saudi Arabia: 190% –China: 164% –Japan: 153% –Brazil: 128% –US: 20% –Canada: 13% –India: 64% –Russia: 86% 19

20. 15 Largest Importers, 2013 (US$ B) Table 7 U.S.2,757 China2,127 Germany1,490 Japan956 France868 U.K.860 South Korea646 Canada585 Netherlands583 Italy566 India560 Singapore509 Russia470 Belgium436 Spain418 World22,152 20

21. Double Counting iPad example – offshoring/outsourcing Parts (hard drive, display, various chips) produced in several countries – exported to China –Exports to China include transportation costs Assembly in China – exported to many countries for sale –China accounts for very small % of total value added –China’s exports of iPad includes imports of parts, software and transportation services Transportation and distribution services included in imports Final retail price includes royalties for Apple for design and software 21

22. Summary, 2013 (US$ Billions) Table 8 CountriesExports, goods & services Imports, goods & services Low Income104163 Lower Middle1,4581,683 Upper Middle4,9944,767 High Income16,72115,926 Eurozone5,7875,330 World22,25422,512 22

23. 10 Largest Current Account Surplus Countries, 2013 (US $ B) Table 9 Germany$242 China183 Saudi Arabia136 Netherlands87 South Korea81 Switzerland73 Kuwait70 Qatar62 Singapore54 Norway51 23

24. 10 Largest Current Account Deficit Countries, 2013 (US $ B) Table 9 U.S.$400 UK120 Brazil81 Turkey65 Canada55 Australia50 India49 France40 Mexico30 Indonesia29 24