Introduction

SPHA511, John Ries

IntroductionGoal of course: Analyze the role of government in private enterprise economies such as Canada.

• Under what circumstances should a government regulate or modify private enterprise and private markets in order to improve economic efficiency or social equity?

• What considerations actually influence governments to intervene in private markets, and how have they done so in the past?

• What are the effects of government intervention?

Introduction

Normative versus positive analysis

Normative analysis asks the question: “What role should the government play in the economy?”

Introduction

• economic efficiency and growth

• macroeconomic stability

• fairness

• other social objectives: the promotion of ethics, multiculturalism, Canadian culture, etc

What are the goals of government?

IntroductionPositive analysis asks the question:

“What explains the actual policies adopted by government?"

Government may act in ways that do not promote public interests due to special interest groups or self-serving bureaucrats

How well do you know Canada?

1.What was the Canadian population in 2007? What percent of the population in 2006 was born outside Canada?

2. What percent of the female population 25-54 was in the labour force in 2006?3. What percent of the 25-64 population held a bachelor's degree or higher in 2006?4. What percent of the Canadian population was 65 years of age or older in age in 2007?

Between 50 and 64?5. What were the unemployment rate, inflation rate in 2007?6. What is Canada’s world rank in terms of per capita income? Who is highest?7. Which provinces had the highest and lowest unemployment rates in 2007?8. What was total government spending relative to GDP in 2007?9. What is the total (federal and provincial) government deficit in 2007-8? What government’s

primary source of revenue? Primary expenditure items?10. What is the largest industrial sector in Canada in 2007 in terms of employment: 1)

manufacturing 2) trade 3) agriculture and fishing, 3) forestry, fishing, mining, oil & gas , 4) health care and social assistance or 5) finance and insurance? In terms of GDP?

11. What percent of manufacturing sales in Canada are accounted for by foreign controlled firms?

12. What are Canada’s leading imports, exports?13. What percent of Canadian GDP was exported in 2007? What was the U.S. share of Canadian

exports in that year?

Immigrant PopulationCanada (2006) Number

Total - Place of birth 6,186,950United States 250,535Central and South America 381,165Caribbean and Bermuda 317,765Europe 2,278,345

United Kingdom 579,625Other Northern and Western Europe 489,540Eastern Europe 511,095Southern Europe 698,080

Africa 374,565Asia and the Middle East 2,525,160

West Central Asia and the Middle East 370,515Eastern Asia 874,370Southeast Asia 560,995Southern Asia 719,275

and other countries 59,410

Macroeconomic Indicators, Canada 1980-2006

0

5

10

15

20

25

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Unemployment rate

Inflation rate

Interest rate

PPP

Sweden 54.2% of GDP

Belgium 45.6% of GDP

France 45.3% of GDP

Italy 42.0% of GDP

Netherlands 41.4% of GDP

Norway 40.3% of GDP

Germany 37.9% of GDP

United Kingdom 37.4% of GDP

Canada 35.8% of GDP

Switzerland 35.7% of GDP

New Zealand 35.1% of GDP

Australia 31.5% of GDP

Ireland 31.1% of GDP

United States 29.6% of GDP

Japan 27.1% of GDP

Total Tax as % GDP

Consolidated federal, provincial, territorial and local government revenue

  2004 2005 2006 2007 2008

  $ millions

Revenue468,557 499,676 531,137 561,187 590,718

Personal income taxes145,324 155,136 167,409 180,034 193,491

Corporation income taxes 38,925 46,928 50,893 58,240 65,995

Property and related taxes 44,244 46,721 49,404 51,220 52,993Consumption taxes

98,918 104,495 107,844 105,396 111,461Health insurance premiums 3,132 3,206 3,258 3,268 3,424Sales of goods and services 39,130 41,275 42,869 45,938 48,278Investment income

35,984 38,600 45,341 47,748 47,791Other revenue from own sources 9,946 7,950 5,950 6,823 3,916

Consolidated federal, provincial, territorial and local government expenditures

　 2004 2005 2006 2007 2008

　 $ millionsExpenditures

474,712 487,365 513,957 543,541 574,070General government services

18,633 18,792 19,796 20,612 21,110Protection of persons and property 39,154 41,096 43,534 46,752 49,125Transportation and communications 20,258 21,172 24,723 25,913 29,516

Health89,479 94,497 99,126 106,919 115,358

Social services121,058 125,372 131,543 139,183 147,659

Education74,246 77,140 82,685 86,837 91,144

Resource conservation and industrial development 19,430 18,652 19,754 20,978 21,379

Environment11,391 11,903 12,935 14,464 16,082

Recreation and culture13,143 13,476 14,207 14,891 15,880

Debt charges49,514 47,686 46,940 47,832 47,281

Surplus or deficit-6,156 12,312 17,180 17,647 16,648

Employment by industry

　 2003 2004 2005 2006 2007

　 thousands

All industries15,672.3 15,947.0 16,169.7 16,484.3 16,866.4

Agriculture332.4 326 343.7 346.4 337.2

Forestry, fishing, mining, oil and gas281.6 286.6 306.4 330.1 339.3

Construction906 951.7 1,019.50 1,069.7 1,133.5

Manufacturing2,275.2 2,292.1 2,207.4 2,117.7 2,044.9

Trade2,467.8 2,507.1 2,574.6 2,633.5 2,682.4

Finance, insurance, real estate and leasing 917.0 960.6 987.8 1,040.5 1,060.4Professional, scientific and technical services 1,003.6 1,018.3 1,050.0 1,089.9 1,136.9Educational services

1,027.1 1,035.7 1,106.1 1,158.4 1,183.2Health care and social assistance

1,679.2 1,733.4 1,734.6 1,785.5 1,846.1Accommodation and food services

1,005.5 1,012.4 1,004.5 1,015.0 1,069.4Public administration

819.0 825.5 833.1 837.4 864.6

Canadian Trade ($cdn billion)

 2003  2004  2005  2006  2007

Exports 399.1 429.0 450.1 453.7 463.1

Agricultural and fishing products 29.2 30.7 30.1 31.2 34.4

Energy products 60.5 68.1 87.0 86.8 91.6

Forestry products 34.5 39.4 36.4 33.3 29.3

Industrial goods and materials 66.8 78.0 84.0 93.9 104.4

Machinery and equipment 88.7 91.1 93.0 93.3 93.4

Automotive products 87.4 90.4 88.0 82.3 77.3

 

 2003  2004  2005  2006  2007

Imports 342.7 363.2 387.8 404.3 415.0

Agricultural and fishing products 21.5 21.4 22.0 23.5 25.5

Energy products 19.8 24.8 33.7 34.6 36.6

Forestry products 3.0 3.2 3.1 3.1 3.0

Industrial goods and materials 65.3 73.5 78.6 84.0 85.1

Machinery and equipment 98.7 104.1 110.9 114.7 116.6

Automotive products 76.5 77.4 78.4 79.8 80.0

Canada Exports (billion $US)

2003 2004 2005 2006 2007

U.S. 326.7 348.1 365.8 359.3 356.0UK 6.1 7.7 8.3 10.1 12.8China 4.8 6.8 7.1 7.7 9.3Japan 8.2 8.6 9.2 9.4 9.2Mexico 2.2 3.1 3.4 4.4 5.0Netherlands 1.6 1.9 2.2 3.1 4.0

Total 381.1 412.3 436.3 440.3 450.4

Canada Imports (billion $US)

2003 2004 2005 2006 2007

U.S. 203.8 209.0 215.2 217.6 220.5

China 18.6 24.1 29.5 34.5 38.3

Mexico 12.2 13.4 14.6 16.0 17.2

Japan 13.8 13.5 14.8 15.3 15.5

Germany 8.6 9.4 10.3 11.1 11.5

UK 9.2 9.7 10.4 10.9 11.5

Total 336.1 355.9 380.9 396.6 406.7

Merchandise Trade, 2005, $US billions

Exports Imports Balance

China (incl. HK) 1054.3 960.8 93.6

Germany 970.7 774.1 196.6

USA 904.3 1732.7 -828.4

Japan 595.8 516.1 79.7

France 459.2 495.8 -36.5

Netherlands 401.3 357.9 43.5

Great Britain 377.9 501.2 -123.4

Italy 366.8 379.7 -12.9

Canada 359.6 320.1 39.5

Belgium 329.7 320.4 9.3

Useful Economic Concepts

1. Opportunity Cost

Definition: "the opportunity cost of any action is the value of the next most valuable action forgone"

2. Incentive Effects

Individuals respond to economic incentives. Policies may have unintended consequences because they alter the incentives of individuals

Useful Economic Concepts

Activity• What is the opportunity cost of attending

this MHA program? Use the formula for the present value of an annuity—PV=A[1-1/(1+i)n]/i, where A is an annual payment, i=0.05 is the interest rate, and n=30 is the number of years working, to solve for the additional income (A) necessary to justify your decision given your opportunity cost (PV).

Incentive effects

• Identify adverse incentive effects associated with– high marginal income tax rates– generous unemployment insurance– free healthcare

• What healthcare policies (pay schemes, etc.) result in adverse incentive effects?

• What is a negative income tax?

Useful Economic Concepts

• The paradox of value (water is cheaper than diamonds): Clearly, water is more important to people than are diamonds, yet diamonds are much more expensive. Why?

• Prices reflect marginal value.

3. Marginalism

Prices are determined on the margin

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Useful Economic Concepts

• It is important not to confuse the total value of an activity with the marginal value of increasing the activity. Just because health care is more important than parks does not mean funding should be increased on healthcare at the expense of parks.

• Marginalist principle: any policy or action should be undertaken only if the incremental or "marginal" benefit exceeds the marginal opportunity cost.

Useful Economic Concepts

• (1) production efficiency is attained when a firm is managed so that total costs are minimized for a given level of output. This is exactly equivalent to saying that the maximum amount of output is being produced from a given level of inputs.

• (2) allocational efficiency is attained when it is impossible to re-allocate the resources among a group of people in such a way as to make at least one person better off without making anybody else worse off. Allocational efficiency is also known as "Pareto-efficiency”.

4. Efficiency

Efficiency relates to two questions: Is a given level of output being produced at lowest cost? Is the right level of output being produced?

Useful Economic Concepts

A Pareto improvement occurs when at least one person is made better off while no one is made worse off. Similarly, a potential Pareto-improvement is said to exist if a re-allocation of resources allows those individuals who are net gainers to (hypothetically) fully compensate the net losers, and still be better off.

Genuine Pareto-improvements are rare in practice, often the best we can hope for often is that a particular policy is a potential Pareto-improvement, which leaves open the question of whether gainers actually compensate losers.

Health care funding and efficiency

There are three ways to potentially increase efficiency in health care

(1) Improve production efficiency—combine resources better in order to deliver more output

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Health care funding and efficiency

(2) Increase the healthcare budget if marginal benefits exceed marginal costs of additional supply.

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Health care funding and efficiency

(3) Within the healthcare budget, reallocate funds away from areas with low marginal benefits and towards those with high marginal benefits

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Total budget

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