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Essay/Term paper: Canada's economy in 1996

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Canada's Economy in 1996


To investigate the state of the Canadian economy, it is very useful to
track Canada's six major economic goals: economic growth, economic stability,
economic efficiency, economic equity, viable balance of payments, and low
unemployment. At a given time, Canada is achieving some of these goals while
falling behind on some of the others. When taken all into consideration, these
goals give an indication of how well Canada has been doing and the stage of the
business cycle the Canadian economy is in. In 1996-1997, Canada is in slight
recession and is only meeting the goals of economic stability, and viable
balance of payments.
Canada can be said to be in a period of slight recession because there is
a downswing in economic activity. To confirm a true recovery, "an economy must
show no growth for two consecutive quarters." However, Canada is not in a true
recession because there was a 3.0% growth in the third quarter, compared to
2.2% in the second quarter. Eventhough it is not true recession, the slow
growth is a sure sign of a slight one. Low inflation is also is also prevalent
and is symptomatic of a weak economy. A low inflation rate of 1.4% in November
1996 does not provide much of an indication for economic growth and expansion.
A shrinking positive balance of payments indicates these are tough economic
times. A fourth indication of a slight recession is the high unemployment rate.
An unemployment rate of 10.0% in November 1996 is definitely not a sign of
strong economic recovery.
Canada is always trying to work towards the goal of economic growth.
Economic growth is the percentage change of GDP over a period of time and is
also known as the growth rate. In 1996, Canada's GDP has been increasing slowly
since the first quarter. The GDP in the first quarter was 1.8%, then increased
to 2.2% in the second quarter, and in the third quarter it rose to 3.0%. In
this way, Canada has been experiencing steady growth. This goal is being met
because of the increase in consumer spending inspite of the government cutbacks.
Consumer spending levels tell producers what to produce, and how much to produce.
If consumer spending increases, it gives a signal to the producers to produce
more which causes the increasing GDP. The government cutbacks contribute does
contribute to lower consumer confidence and, thus, slows the economic growth.
Slow, growth causes few jobs to be created as it means a slower rate of
expansion of industries. When there is slow growth, few jobs are being created,
so it does not help the goal of low unemployment. Slow growth also keeps
inflation low. For example, in September 1996, the inflation rate changed from
1.3% to 1.2%. To stimulate economic growth, interest rates must be kept low.
For example, the bank rate decreased to 3.5% in November 1996. This encourages
businesses to borrow money and to expand. Increased exports also help stimulate
economic growth, because increases in foreign demand for Canadian goods and
services may stimulate the domestic markets.
The goal of economic stability has been achieved. In 1996, the inflation
rate has been relatively low. The inflation rate has been kept low as a result
of consumer confidence. Consumers were not willing to spend on expensive items
with the current job picture. This has contributed to the low inflation rate.
For 1996, the annual inflation rate has been in the 1.2% to 1.7% range. The CPI
in November 1996 was 136.8, but in November 1995, the CPI was 134.1. Over the
course of the year, the CPI has only changed 2.0%. The effects of stability is
that the purchasing power of Canadian currency remains more of less the same.
With low inflation, the value of the Canadian dollar, decreases very little.
Inflation rate can be tolerated if it provides an incentive for businesses to
expand. There, low inflation is also an incentive of economic growth. Low
inflation prompts the banks to lower interest rates which also encourages
economic growth. Since there are trade offs when deciding whether to raise or
lwer the inflation rate, governments must keep in mind that high inflation is
not healthy, but a little inflation is a prerequisite for growth.
The goal of economic efficiency has not yet been achieved, but Canada
has always been progressing towards this goal. In Canada, technology has
constantly been improving and updating. If new technology is used, the economy
can operate more efficiently, for example, the Bank of Montreal has introduced
branchless banking and, computers and machines are replacing human labour. This
saves the Bank of Montreal money in hiring workers and having branches all over
the city. The reason why Canada has still not met this goal is because they
are losing valuable skill in labour which also lends to efficiency. Not only
are banks replacing workers with computers, but even the government is trying to
cut down on workers; for example, by scraping the school boards. This means
that skilled workers will not have jobs and, therefore, workers are not used to
their maximum efficiency. In the approach towards optimum efficiency, Canada is
increasing its competitiveness in the global market as well as chances for
stronger economic growth. The unemployment problem can be addressed through job
creating programs.
The goal of equity has not been reached and the Canadian economy has
been regressing from it rather than approaching it. Income inequality is one
sign of inequity. There is income inequality between

The goal of viable balance of payments has only been achieved for some
parts; Canada had a trade surplus where the value of exports have exceeded the
value of imports, but in late 1996, that difference between exports and imports
decreased. In September, the exports amounted to 23.5 million and in October
21.1 million. While the exports decreased by 2.4 million, imports only
decreased 0.7million (from 20.3million to 19.6 million). With only a small
trade surplus, Canada is not doing well in this area. It is because of the
capital account. Investment abroad was -9420 million in the third quarter while
Investments in Canada was only 1824 million, leaving the total capital account
to be -7596 million. This negative balance has the undesirable effect of
slowing economic growth. As foreigners invest in our country, they bring in
valuable resources such as labour and capital. To encourage a more viable
balance of payments, the Canadian government can discourage imports by placing
tariffs which cause the price of imports to rise. Canadian industries can also
improve exports by increasing production. The government will have also have
to increase their sales pitch when trying to get foreigners to invest.
The goal of low unemployment has not been reached eventhough Canada has
persistently made attempts to reach it. In October 1996, the unemployment rate
rose from 9.9% to 10.0%. This rate is quite high compared to the inflation rate
which is currently less than 2%! Unemployment has many negative effects. It
causes income inequality which is in direct contradiction to the goal of equity.
Because of unemployment, consumer confidence has dipped. The lack of jobs has
caused consumers to hold back on many of their purchases. This reduces retail
sales and the production of consumer goods which stifles economic growth. The
unemployment rate and current economic conditions have caused the unemployed to
become frustrated at the job markets as it becomes increasingly difficult to
land a secure job. The banks are major players in the battle against
unemployment. Instead of sacrificing employment for lower inflation rates, the
banks can lower interest rates and stimulate economic and job growth. A second
major player is the government. Through retraining and job creation programs,
the government can help the unemployed increase the likelihood of obtaining a
job.
In 1996-1997, Canada has been through a period of tough economic times.
On the average, Canada has been trying to meet its six economic goals. However,
some economic goals are contradictory, so to reach one goal, Canada cannot reach
another. Therefore, trade offs are made depending on the relative importance of
a particular goal in comparison with the other goals at a given time. Although
the overall impression of Canada's current economy made by these six goals is
not a particularily encouraging one, it does provide hope for a better, stronger
future economy.

 

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