Canadian Government and the Bank of Canada - Example

Canadian government and the Bank of Canada Name Tutor Course Introduction Canada is among the great nations in the world. Since 2008, after the global financial crisis, its economy has proved to be one of the strongest developed economies around the world. By considering its gross domestic product (GDP) in current prices, the Canadian economy is believed to be the 9th largest economy in the world. The increasing development in Canadian economy has been facilitated by efforts of Canadian government and Bank of Canada. The Canadian government and the Bank of Canada have for along time employed several macroeconomic policies in development of Canadian economy. The most common macroeconomic policies used by the Canadian government and the Bank of Canada are fiscal policies and monetary policies. This paper therefore seeks to evaluate how successful have the Canadian government and Bank of Canada been in running the Canadian economy for the past two years. It also seeks to describe and evaluate the main macroeconomic policies used by the Canadian government and the Bank of Canada over the past two years. The Canadian government and the bank of Canada have been very successful in running the Canadian economy. Their success is well depicted by the steady growth of the Canadian economy since the year 2010. The Canadian government and the Bank of Canada through diversification of Canadian economy and strengthening of Canadian dollar have expanded the nation’s gross domestic product. The real gross domestic product has enhanced by 0.4% in the fourth quarter of 2011. This was after a one percent increase in real GDP in the third quarter. On average, the Canadian gross domestic product has been growing by 0.8% from 1961 to 2011. The growth rate of Canadian gross domestic product can be illustrated by the following graph1. The growth in Canadian gross domestic product in the first quarter has been facilitated by the government efforts to increase consumer spending and exports. The Canadian government managed to expand consumer spending on goods and services by 0.7% in the fourth quarter. It also managed to increase purchases of durable commodities by 2.1%. The Canadian government, through export and import promotion, has enhanced exports by 1.1% and imports by 0.5%. Promotion of exports and imports has enabled the Canadian industrial sector to grow in the forth quarter. The government efforts to promote exports and imports have made both goods-producing and services industries to grow by 0.5% and 0.4% respectively in the fourth quarter. The promotion also expanded manufacturing industries, retail trade and extraction of oil and gas, thus enhancing the Canadian economic growth. The success of Canadian government and the Bank of Canada in running the Canadian economy can be seen in the way Canadian inflation has been controlled since 2011. The Canadian government and the Bank of Canada have for along time tried to stabilize inflation rate. Canadian inflation rate was previously reported in March 2012 to be 1.9 percent. From 1915 to 2010, the Canadian economy recorded an average inflation rate of 3.26 percent, but from 2010 to Feb. 2012, the Canadian economy recorded an average inflation rate of 2.1%. This therefore shows how the Canadian government and Bank of Canada have been effective in controlling inflation rate. Inflation rate refers to persistent increase in price level measured against a standard level of purchasing power. The most common measures of inflation are consumer price index (CPI) and gross domestic product deflator2. Consumer price index measures consumer prices while GDP deflator measures inflation of the entire domestic economy. The following graph shows the fluctuation in inflation rate, which depicts an average of 2.1 percent from January 2010. For the past years, since February 2010, the Canadian government and Bank of Canada have work so hard to control inflation rate at an average of 2.1%. The Canadian inflation rate in February 2010 was 1.582%. In February 2011 and February 2012, inflation rate increased slightly to 2.162% and 2.625% respectively. The slight increase in inflation rate has been due to the increase in energy cost, the increase in prices for gasoline and electricity. For the past twelve months since February 2012, the cost of energy increased by 7.2%, prices for electricity and gasoline increased by 8.9% and 8.7% respectively. Food prices over the past two years have increased by 4.1%. The Canadian government and the Bank of Canada have been successful in running the Canadian economy through unemployment rate reduction. Unemployment refers to a situation in which individuals looking for job are not hired. The Canadian government and the Bank of Canada have worked so hard in the past years to reduce unemployment rate to 7.2%. They have implemented several policies that stabilize the economy and create more jobs for Canadians. This therefore has made many Canadians to secure employment, thus reducing the unemployment rate. By March 2012, unemployment rate in Canada was reported to be 7.2%. The labor force in Canada is defined as the number of individuals who are employed plus the number of individuals who are not employed but looking for job3. In Canada, individuals who are not included in the labor force include those who are not seeking for employment, those working in the military and those who are institutionalized. The graph below shows the trend in unemployment rate since the year 2010. For the past two years, the Canadian government and the Bank of Canada have made changes on their operations that increased the number of employed individuals to 82,000 by March 2012. This made the unemployment rate to go down by 0.2% to 7.2%. The gains from the increase in employment rate in March were spread across various industries, including social assistance and health care, public administration, information, recreation and culture. There was a marked increase in employment in Manitoba, Quebec and Ontario and a slight decline in employment in New Brunswick and Nova Scotia. There was also a marked in employment among individuals aging 55 years and above and among the youth. By March 2012, employment enhanced remarkably among private sector workers and edged up for workers in the public sector and the self-employed. For the past two years, the number of workers working in a private sector increased by 1.7%, while those working in the public sector and the self-employed displayed a small positive change. This information therefore depicts how the Canadian government and the Bank of Canada were successful in reducing unemployment rate in the economy. The main macroeconomic policies used by the Canadian government and the Bank of Canada Monetary policy, fiscal policy and supply side policy are the main macroeconomic policies used by the Canadian government and the Bank of Canada to increase Canadian economic growth rate, to control Canadian inflation and to reduce Canadian unemployment rate. The Bank of Canada normally employs monetary policy in running the Canadian economy. Monetary policy refers to measures taken by the Bank of Canada to control money and credit supply in the economy. The Bank of Canada has a responsibility of reducing the total amount of money in circulation, if the Canadian economy is experiencing full employment. At full employment, there is always an increase in money supply and inflation. Therefore, by employing monetary policies such as bank rate, open market operation or credit rationing, the Bank of Canada will be able to control both the money supply and inflation. The main goal of the Bank of Canada is to maintain inflation rate at around two percent per annum. The Bank of Canada normally employs its monetary policy by setting short-term interest rates. It normally employs monetary policy through printing of Banknotes. It is believed that the Bank of Canada is the only bank that has been given the mandate of making and distributing the official Canadian currency, which is Canadian dollar. The Bank of Canada normally prints more money when there is a marked reduction in money supply4. The Canadian government normally employs fiscal policy in running the Canadian economy. For the past two years, the Canadian government has been using fiscal policy to control inflation, reduce unemployment rate and enhance economic growth. Fiscal policy refers to the use of government expenditure, taxation and borrowing to influence the pattern of economic activity and the growth and level of total demand, employment and output. Therefore, the main tools of fiscal policy employed by the Canadian government are government expenditure, borrowing and taxes. The Canadian economy normally collects taxes so as to finance expenditures on various public goods and services, such as highways, Parks and defense. When government expenditure exceeds the collected tax revenues in a given year, the economy will experience government deficit for that period. On the other hand, if the tax revenues exceed the government expenditure, the economy will experience a budget surplus5. Budget deficit is usually financed through government borrowing. The Canadian government can borrow from other trading partners or from institutions such as World Bank so as to finance the budget deficit. It can also issue long-term, interest-bearing bonds so as to finance the deficits. When the government finances a budget deficit through borrowing, it is simply increasing the national debt. On the hand, if the government experiences a budget surplus, it will employ the surplus to minimize any national debt that prevails. The government is said to experience a balanced budget if tax revenues are equal to government expenditures. As the main macroeconomic policy used by the Canadian government and the Bank of Canada, supply side policies refer to economic polices that are designed to enhance supply –side capability of an economy, which make industries and markets to function very effectively, thus contributing to faster increase in real national output. Of late many governments, including the Canadian government, agree that an enhanced supply-side performance is very essential in attaining stable economic growth with low inflation rate. However, it is important to understand that supply-side reform cannot work independently to attain this kind of growth. There should also be a high amount of total demand so as to assist the productivity capability of an economy to come into play6. The supply side has two extensive approaches. The fist approach concerns with product markets and the second approach concerns with labor market. The supply side policies for product market are developed in such a way that they increase efficiency and competition. If, for example, the productivity of an industry is enhanced, then more products will be produced with the prevailing resources, thus shifting the long run average supply curve to the right7. The supply side policies for labor market are developed in such a way that they enhance the quantity and quality of labor supply that is available in the economy. They are normally employed with the aim of making the labor market too flexible. This normally enables the labor force to match the labor demands. Conclusion From the discussion, it is clear that Canadian government and Bank of Canada have successfully managed the Canadian government over the last two years. Their success is well depicted by the steady growth of the Canadian economy since the year 2010. The Canadian government and the Bank of Canada through diversification of Canadian economy and strengthening of Canadian dollar have expanded the nation’s gross domestic product. On average, the Canadian economy has grown by 0.8%. The Canadian government and the Bank of Canada have also managed to control inflation rate to an average of 2.1%. The success in running the Canadian economy by the Canadian government and the Bank of Canada can be seen through unemployment rate reduction. The Canadian government and the Bank of Canada have worked so hard in the past years to reduce unemployment rate to 7.2%. It is also clear from the discussion that monetary policy, fiscal policy and supply side policy are the main macroeconomic policies used by the Canadian government and the Bank of Canada. References Brux, J. (2010). Economic Issues and Policy. New York: Cengage Learning. Clapham, J., & Guillebaud, C. (2011). Monetary Policy. BiblioBazaar. Gnos, C., & Rochon, L. (2011). Credit, Money and Macroeconomic Policy: A Post-Keynesian Approach. New York: Edward Elgar Publishing. Schwießelmann, J. (2010). Fiscal Policy. Berlin: GRIN Verlag. Trading Economics. (2012). Canada GDP Growth Rate. Retrieved on 23 April 2012, from Trading economics. (2012). Canada Inflation Rate. Retrieved on 23 April 2012, from < http://www.tradingeconomics.com/canada/inflation-cpi >. Trading economics. (2012). Canada unemployment rate. Retrieved on 23 April 2012, from < http://www.tradingeconomics.com/canada/unemployment-rate >. Read More