This book introduces you to the way the Canadian economy works and suggests a way to make sense of the major economic indicators that are published from day to day. I do not assume that you have prior formal training in economics or accounting. Whereas textbooks concentrate on theory, this book has a different aim: to strengthen your intuition about what is going on out there, so that you can make your business (and for that matter household) decisions more confidently and effectively.

Statistics Canada (‘StatsCan’), the U.S. Department of Commerce, and other agencies publish many economic indicators each day....

Economic forecasters try to predict human behaviour — but not all of it. Their scope is limited to behaviour that manipulates assets and liabilities. Whatever people do that influences the value of their assets and liabilities is a valid concern for an economist.

Let us start by defining an economic decision: it is a decision that alters one’s portfolio of assets and liabilities. It can be implemented by buying, selling, lending, or borrowing — or even by doing nothing. Economic decisions are taken by transactors, who may be individuals, households, small businesses, institutions, corporations, or governments; we may want to...

In the SNA, householders play two roles. On the one hand, they are employees and consumers; on the other hand, as proprietors of small businesses, they employ people and invest in capital. StatsCan calls these the ‘personal’ aspect and the ‘unincorporated business’ aspects of the sector.

Households are a major stabilizing force in the economy. To understand how they behave, we must fit them into the circular flow described in the last chapter. Remember, from that discussion, that the producers of GDP — those who supply labour and capital — earn net domestic income (NDI), in essentially four categories: labour...

Now we move from households to enterprises. Enterprises are the instruments of a capitalist society for deciding what to produce and how to produce it. As consumers’ preferences change, entrepreneurs offer new goods and services, change the characteristics of old ones, and try out new prices for their products. They are also constantly experimenting with new ways to produce, responding to changing relative input prices and to new technological possibilities. This ceaseless experimentation is costly and risky, but it carries high potential reward. Entrepreneurs’ central contribution to the market economy is their unending effort to find new and more satisfactory...

Charts 11 and 12, which refer to all the levels of government taken together, make clear how dramatically their role in the economy has increased in recent decades. Governments’ capital spending did not contribute to this expansion (outlays on roads, schools, airports, and so on peaked in the 1960s as a factor in the economy), and capital transfers (subsidies to business to encourage investment) have not been a major growth area. But the public sector expanded sharply in the late 1960s, followed by a massive increase in transfer programs from the early 1970s onward and finally by sharp growth in...

In most countries, the central bank’s assignment is to keep inflation low. In practice, however, this means that it has a much bigger responsibility as well — namely, to manage aggregate demand as a whole. While governments substantially affect private behaviour through their taxation and transfer policies, these are unwieldy instruments for managing economic fluctuations, since they are normally set just once a year. For practical purposes, the Bank of Canada, exercising subtle but pervasive control over aggregate demand through its influence on interest rates and exchange rates, governs Canada’s economic engine.

The Bank of Canada was set up by...

Canadians interact with non-residents, as they do with each other, by buying and selling goods and services, by borrowing and lending (i.e., acquiring financial assets from each other), and by making and receiving transfers. However, in the last decade, dealings with foreigners have become vastly more sizeable than ever before (Chart 16).

Statistics Canada reports on Canadians’ economic relationships with non-residents in the National Income and Expenditure Accounts, Canada’s Balance of International Payments (see Balance of Payments), and Canada’s International Investment Position, all components of the SNA (described below in Chapter 11). It reports trade in physical goods in great...

So far I have referred little to the price level (that is, the overall price index for the goods and services included in GDP). Households, enterprises, and governments base their decisions mostly on their perceptions of ‘real,’ not nominal values, and above I have ignored the price level as such, except as it influences PPP. But the central bank works very hard to manage the rate of change of the price level — that is, the rate of inflation — and we need to know why and how.

In chapters 3 and 6, I did discuss three ‘prices’ that affect...

The labour market — where the price of labour is determined — is central to the economy. The key question is this: when the demand for labour changes, does the real wage (the nominal rate of compensation, divided by the price level) tend to respond strongly? Or can firms hire essentially as much or as little labour as they want at a given time without having to adjust their real wage offer very much? (In this discussion, the ‘real wage’ stands for the real value of the total compensation package, including supplementary benefits, offered by an employer.)

Individuals have to...

On one level, the aim of fiscal policy is simply to finance a desired level of government services prudently. But as we saw in chapter 4, there is much more to it. Federal and provincial governments’ fiscal policies — their decisions about the size of current and capital outlays on goods and services, transfers, and taxes — affect profoundly the incentives that underlie private demand. However, if the Bank of Canada thought that these fiscal policies might push inflation outside the target range, it would certainly tighten monetary conditions, which would feed back in turn on governments’ own revenues and...

Peering into the early years of the twenty-first century, one sees in North America and western Europe central bank-managed regimes engaged in maintaining the low-inflation environment established with difficulty during the 1980s and 1990s. Fiscal policies in these countries will probably continue to be broadly oriented to reducing the ratio of public debt to GDP, anticipating heavy demands on the social safety net as the baby boomers retire. Enterprises will continue incorporating new telecommunications-based technologies. Asia, eastern Europe, Latin America, the Middle East, and Africa, thirsty for development funding, will play increasingly by the rules of global finance, while struggling...

You can easily get access to the major economic indicators for Canada and the United States through the internet. Each of the indicators listed in chapters 11 and 12 has a website address, and a further list of useful websites is provided in the next chapter. But a few warnings are in order. In particular, the first (‘advance’) releases of some indicators are based on limited data, sacrificing accuracy for timeliness. And even if the estimated level is fairly reliable at the time of first release, the size or direction of change from the previous period may not be. Even...

A convenient way of obtaining data on the U.S. economy is through the website operated by the U.S. Department of Commerce: domino.stat-usa.gov/. Updated daily, it provides easy access to a large number of significant daily, weekly, monthly, and quarterly series. In addition, it carries speeches by Federal Reserve Board officials, the Economic Report of the President, and a schedule of the indicators’ release dates. Some data can be accessed free; lengthier series are available by subscription (credit cards are accepted online).

A website that provides a huge number of links to sites of interest is entitled Resources for Economists on...