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ECONOMICS 3150M

ECONOMICS 3150M. Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068. Lecture 2: January 8 Ch. 1, 13. 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?

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ECONOMICS 3150M

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  1. ECONOMICS 3150M Winter 2014 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

  2. Lecture 2: January 8Ch. 1, 13

  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. National Income Accounting • GDP: Y = C + I + G + EX – IM • Current account (CU): EX – IM • Y – C – G = CU + I • Nominal GDP in Canada, 2012: $1,820 billion • Consumption (C): $987 billion (54%) • Investment (I): $360 billion (20%) • Government (G): $472 billion (26%) • Exports (EX): $547 (30%) • Imports (IM): $583 billion (32%) • 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, 2012GDP (US$ B)

  6. Macroeconomics • Top 10: $46,443 (65%) • Top 25: $59,577 (83%) • EU: 26% • Portugal: $212 • Italy: $2,013 • Ireland: $210 • Greece: $249 • Spain: $1,349 • PIIGS: $4,123 (6%) • US: 22% • Canada: 2.5% • Brazil, Russia, India, China: $14,300 (20%)

  7. Canada in the Global Economy, 2012GNP per Capita (US$)

  8. 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

  9. 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

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

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

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

  13. Canada’s Current Account

  14. 15 Largest Exporters, 2012 (US$ B)

  15. Exporters • Other notable countries • India $442 B • Brazil: $293 B • U.A.E.: $297 B • Mexico: $365 B • Taipei: $354 B

  16. 15 Largest Importers, 2012 (US$ B)

  17. 10 Largest Current Account Surplus Countries, 2012 (US $ B)

  18. 10 Largest Current Account Deficit Countries, 2012 (US $ B)

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