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The Bank of Canada

Monday, September 6th, 2010

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The Bank of Canada has increased the target for its trend-setting overnight lending rate on July 20, raising it by a quarter of a percentage point to 0.75 percent. The increase follows on the heels of an equal interest rate increase in June 2010, when it was raised for the first time since 2007. The Bank rate now stands at one percent.

In its most recent interest rate announcement, the Bank marked down its outlook for economic growth globally, emphasizing the uneven economic recovery in the U.S. and weakening prospects for European economic growth.

In the Bank’s view, Canada’s domestic economy is largely evolving as expected in recent months, but it trimmed its forecast for economic growth this year and next by 0.2 percent to 3.5 percent in 2010 and 2.9 percent in 2011. While the Bank raised its forecast for Canadian economic to 2.2 percent in 2012, it nonetheless left the easing trend for growth intact.

The Bank indicates, “[this] revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada. The Bank anticipates that business investment and net exports will make a relatively larger contribution to growth.

“Where the domestic recovery had previously been led by housing and consumer spending it is now guided more by government stimulus.”

The Bank also reaffirmed its view that housing activity and household expenditures were pulled forward into the first half of 2010, which is expected to cause them to soften in the second half. It also recognized that business investment has been weaker than it previously expected, “held back by global uncertainties.” The Bank anticipates that “business investment and net exports will make a relatively larger contribution to growth” over its forecast horizon.

As of July 20, the advertised five-year conventional mortgage rate of 5.79 percent was down 0.06 percent from one year earlier, and 0.2 percent below where it stood when the Bank made its previous interest rate announcement on June 1. However, it is 0.3 percentage points higher than it was at the beginning of the year.

The Bank has signaled to financial markets that it is leaving its options open as to whether it will raise interest rates further when it makes its next rate announcement on September 8.

“As it did with its previous announcement in June, the Bank messaged financial markets that further interest rate increases are not pre-ordained,” says Gregory Klump, chief economist at the Canadian Real Estate Association. “The strength of recent economic indicators has prompted the Bank to raise interest rates, but the Bank has signaled that it may keep rates on hold should the economic recovery begin to show signs of losing steam.”

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Chapter Summary

Friday, September 3rd, 2010

The sole proprietorship and the partnership have the advantages of being easy to form, and of providing strong motivation and a high degree of independence. Disadvantages include lack of access to financing, lack of managerial expertise, the unlimited personal liability of the owner(s) and higher tax rates once the income of the business exceeds a certain amount. An added disadvantage of the partnership is the possibility of disagreements among the partners.

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New Terms

Tuesday, August 31st, 2010

Sole Proprietorship - A business firm owned (and usually managed) by a single person who bears full legal liability for the firms debts.

Partnership – A business firm owned by two or more persons, with each person bearing full legal liability for the firm’s debts.

Corporation – A business firm which is a separate legal entity from its owners, or shareholders, each of whose liability is limited to the amount of his or her investment in the firm.

Conglomerate – A group of seemingly unrelated types of corporations controlled in varying degrees by a central management group, through “holding companies” which own shares in those corporations.

Crown Corporation – A corporation owned by a government, being ultimately responsible, through a cabinet minister, to that government.

Proxy – A legal instrument whereby a shareholder’s right to vote at shareholder’s meetings is delegated to another person, either with or without specific instructions as to how that vote will be exercised.

Board of Directors – A group of people elected by the shareholders of a corporation to provide direction to the management of the corporation.

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Market structure

Friday, August 27th, 2010

In this chapter we have considered the nature of the “business sector” of the economy, which produces the supply of goods and services. In Chapters 6 through 10, we will see how supply and demand interact to determine prices. This task is complicated somewhat by the fact that supply – the production of goods and services by businesses – occurs under various conditions, ranging from industries comprised of large numbers of small firms to industries dominated by a few large firms to industries in which there is only one producer (a monopoly). These different conditions – referred to as “market structures” by economists – are of great significance to the supply of goods and services. If there is only one firm in an industry (a monopoly), it is in a position to control the supply of the product, thereby raising the price of the product and increasing its profits. In industries dominated by a few large firms, it is sometimes possible for these firms to get together to avoid competing on prices and thus increase their profits. On the other hand, in industries in which there are a large number of small firms, such collective action is very difficult or impossible to achieve; as a result, competition in such industries tends to be more intense, ad profits lower, than in either of the first two cases. In Chapter 6, we will examine the concept of “demand,” then in Chapter 7, we will begin our examination of “supply” (and its interactions with “demand”) in those industries in which there are a large number of small firms – industries that economists call “competitive”.

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More on Business Organization in Canada

Tuesday, August 24th, 2010

While government enterprises play a smaller role in the manufacturing sector, they include some well-known names, such as De Havilland Aircraft and Canadair at the federal level, and some provincial governments have acted as partners in manufacturing firms in attempts to stimulate growth and employment in some regions. Finally, in 1981, the Post Office was converted from a government department into a Crown Corporation, in the hope that its new form would reduce the political element that had been strong when it was a government department and would allow it to concentrate on improving efficiency and employee relations, so as to become more competitive with other carriers and more financially self-sufficient.

To summarize, government enterprises are “big business” in Canada, many of them being household names and major forces in the economy. The objectives of these enterprises are not only profits – some of them, such as Canadian National Railways and the Canadian Broadcasting Corporation, are intended to provide particular services throughout the country whether to do so is profitable or not, or to aid in the development of particular industries, products or regions. The matter of government enterprises has always been a controversial one, with their critics arguing that such operations tend to be very inefficient because of political interference and the absence of the profit motive, and their supporters arguing that they are an essential component of the Canadian economy, performing functions that private enterprise would not or could not. Notwithstanding this debate over the value of government enterprises, the fact is that they comprise a large part of the Canadian economy, one which has been planned to grow even further, with PetroCan to become a major force in the Canadian energy field.

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Business Organization in Canada

Friday, August 20th, 2010
  1. The corporation, the typical form taken by larger businesses, has the advantages of being able to raise larger amounts of capital due to the limited liability of its shareholders, and of lower tax rates on income above a certain level. Disadvantages include the initial costs of incorporation and a greater degree of government regulation, especially with respect to public corporations.
  2. Small business is an important and dynamic sector of the Canadian economy, consisting of many hundreds of thousands of firms and employing up to 40 percent of the nation’s labor force.
  3. Major problems faced by small business include lack of management expertise, financing problems, government regulations and paperwork, difficulties attracting and retaining skilled employees, and coping with inflation.
  4. A wide variety of government programs exists to assist small business in areas such as financing, management counseling, marketing, personnel recruitment, and research and development.
  5. The Canadian Federation of Independent Business is an organization of over 55,000 small businesses which acts as the small business lobby with government, promoting free competitive enterprise.
  6. Big business is another major component of the Canadian economy, accounting for as much as half the economy’s output, according to some measures. While these large corporations are important to the Canadian economy, the domination of some industries by a few very large corporations raises questions as to whatever such corporate concentration is in the public interest.
  7. A different form of business concentration is the “conglomerate,” in which companies in a variety of industries are controlled by a central management group, through holding companies.
  8. Control of the modern large corporation is not usually in the hands of the shareholders as a group; rather, it tends to rest with top management and/or the Board of Directors, neither of which are usually major shareholders.
  9. A significant number of Canada’s large corporations are government owned, particularly in the areas of electrical utilities, transportation and communications, and energy and resources.

Discussion Questions:

  1. Do you believe that small business will become more or less important in the Canadian economy in the future? Why?

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Summary

Tuesday, August 17th, 2010

We have now examined both demand and supply under competitive conditions (in this chapter); these concepts are summarized in Figure 7-11. We are now ready to consider how demand and supply interact, by putting them together, as in Figure 7-12.

Figure 7-11 Supply and demand schedules for steak in Cantown, March 1982

Demand

The Relationship between the price of the product and the number of units buyers will offer to buy

Price of steak per kilogram                                                              Quantity demanded (kilograms)

$10                                                                                                            20,000

8                                                                                                             30,000

6                                                                                                             50,000

4                                                                                                             80,000

2                                                                                                           120,000

Supply

The Relationship between the price of the product and the number of units producers will offer to sell

Price of steak per kilogram                                                             Quantity supplied (kilograms)

$10                                                                                                        100,000

8                                                                                                            80,000

6                                                                                                            50,000

4                                                                                                            20,000

2                                                                                                                  0

As the supply and demand schedules in Figure 7-12 show, the price of steak will tend to settle at $6 per kilogram. This is called the equilibrium price. It is not possible for the price to stabilize at any other level, because all other prices lead to either a shortage or a surplus.

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The Nature of Supply

Friday, August 13th, 2010

Finally, as with elasticity of demand, elasticity of supply tends to increase over a period of time. When the price of the product first increases, it may be impossible to increase the quantity supplied for a while. However, given more time, producers are often able to increase the quantity supplied in response to price increases. The difference between elasticity of supply in the short run and in the long run is illustrated in Figure 7-10, with the supply becoming much more elastic in the long run. What is the actual difference between the short run and the long run? For plastic toys, it may be a matter of days before production can be increased significantly; for annual agricultural products, up to a year. For higher oil prices to stimulate increased exploration, development and production of oil on a large scale, ten to fifteen years are required.

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Discussion Questions

Monday, August 9th, 2010
  1. Many schools employ student labor for various purposes, such as partime help in the athletic department. Try to draw the supply curve and the demand curve for student labor in your school, so as to estimate the equilibrium wage rate for student help. (Hints: For the supply curve, survey your friends to try to determine how many hours per week they would be willing to work at various wage rates. For the demand side, determine or estimate the school budget for student help so as to calculate how many hours of student help could be bought at various wage rates. The equilibrium price will be a wage rate, while the equilibrium quantity will be the total number of hours of work purchased by the school.)

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