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INTERNATIONAL UNIVERSITY – VNU HCMC

SCHOOL OF BUSINESS

BA119IU - Introduction to Macroeconomics

Semester 2 2022-2023
Group Assignment
VERSION A - CANADA
Instructor: Dr. Hoang Thi Anh Ngoc
Group 7

Group Members Student ID Contribution

Diệp Trâm Anh BABAIU22334 100%

Đặng Anh Thư BABANS22077 100%

Trương Ngọc Thảo Điền BABAIU22406 100%

Phạm Huỳnh Trúc Linh BABAIU22356 100%

Trương Quang Minh Tâm BABANS22070 100%

HO CHI MINH 2023

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Contents
Part 1: Overview of some basic macroeconomic variables ................................................................... 3
Inflation .............................................................................................................................................. 4
Unemployment ................................................................................................................................... 5
Current Account Balance ................................................................................................................... 6
Foreign Exchange Reserves ............................................................................................................... 7
Part 2: GDP and its components ............................................................................................................ 8
a. A domestic auto manufacturer sells a car from its inventory to the Nguyen family: .................... 8
b. A local city hires workers to plow snow after a snowstorm: ......................................................... 8
c. Aunt Melinda buys a new air conditioner from a domestic manufacturer: .................................... 8
d. Your parents pay an accountant to file their tax returns: ............................................................... 8
e. A car company manufactures a new car brand and adds it to its inventory: .................................. 9
Part 3: Monetary system ........................................................................................................................ 9
Part 4: Theory of Open Economy ........................................................................................................ 10
Part 5: Aggregate Demand – Aggregate Supply .................................................................................. 13
The stock market declines sharply, reducing consumers’ wealth. ................................................... 13
The federal government increases spending on national defense. ................................................... 14
References ............................................................................................................................................ 15

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Part 1: Overview of some basic macroeconomic variables

GDP Growth:

Canada's GDP growth has shown both positive and negative trends during the previous decade. From
2012 through 2019, the country experienced modest economic growth, with annual GDP growth rates
ranging between 1.0% and 3.3%. The COVID-19 pandemic and related lockdown measures, on the
other hand, led Canada's GDP to fall by 5.4% in 2020. In the first quarter of 2023, real GDP
expanded by 0.7% by industry, the fastest pace since the second quarter of 2022, when several
industries recovered from the impact of the Omicron version. Manufacturing grew by 0.1%, reversing
the decline observed in the fourth quarter of 2022. The service-producing industries grew by 0.9%,
representing the ninth consecutive quarter of expansion.

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Inflation

In Canada, inflation has generally remained within the target range set by the Bank of Canada, which
is 1–3%. From 2012 to 2020, the inflation rate in Canada fluctuated between a low of 0.9% and a
high of 2.3%. However, the COVID-19 pandemic may have caused some fluctuations in recent
months. In May 2021, Canada experienced a decrease in the inflation rate, with it falling to 3.4%
from 4.4% in April. This decline was mainly driven by lower transportation prices, particularly
gasoline, and reduced inflation for durable goods. The core inflation rate, which excludes volatile
items such as food and energy, also eased to 3.7%. The Bank of Canada has indicated the possibility
of implementing more interest rate hikes as inflation remains above its 2% annual target. In June
2023, Canada's inflation rate dropped significantly to 2.8% from the 3.4% annual rate recorded in
May 2023. This decline was primarily attributed to reduced gas prices, which saw a 22% decrease
compared to the previous year. When excluding gasoline prices, inflation stood at 4% in
June.Notably, food inflation of 9.1% and mortgage loan inflation of 30.1% were the key elements
contributing to inflation during the last year.. Excluding food, inflation reached 1.7%, while the
Consumer Price Index (CPI) only rose by 2% when excluding mortgage interest. Monthly CPI
increased by 0.1% in June, compared to a 0.4% rise in May. In summary, Canada's inflation rate has
generally stayed within the target range set by the Bank of Canada. However, the COVID-19
pandemic has led to fluctuations in recent months. Decreased transportation prices, including
gasoline, and lower inflation for durable goods contributed to a slowdown in inflation. In June 2023,
inflation dropped significantly due to reduced gas prices, with grocery inflation and mortgage interest
inflation playing significant roles in overall inflation trends.

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Unemployment

Canada's unemployment rate has undergone notable fluctuations over the past decade. From 2012 to
2019, it ranged between approximately 5.5% and 7.3%. However, the emergence of the COVID-19
pandemic in 2020 brought about a significant increase, with the unemployment rate peaking at 13.7%
in May of that year. Since then, there has been a gradual decline, but the rate has remained above pre-
pandemic levels. In June 2021, the unemployment rate in Canada rose slightly to 5.4%, surpassing
market estimates. This increase was primarily attributed to a rise in the labor force participation rate.
The economy added 60,000 jobs in June 2021, with notable growth in sectors such as wholesale and
retail trade, manufacturing, and healthcare and social assistance. Following a period of stability at
5.0% from December 2022 to April 2023, the unemployment rate increased to 5.2% in May. The
youth unemployment rate reached 10.7%, marking the highest level since October 2022. Among
individuals aged 55 and older, the unemployment rate saw a slight increase to 4.1%, partially
offsetting a decline observed in April. The core working age unemployment rate stood at 4.3% in
May. Different demographic groups experienced varying unemployment trends. South Asian
Canadians witnessed a year-over-year decrease in unemployment, while Chinese and Black
Canadians experienced little change. The participation rate, which reflects the proportion of the
population actively engaged in the labor force, decreased to 65.5% in May. This decline was
primarily driven by lower participation rates among youth aged 15-24. Overall, the Canadian labor
market has been significantly impacted by the COVID-19 pandemic, leading to substantial
fluctuations in the unemployment rate. While there have been improvements and job additions in
certain sectors, challenges persist, particularly for specific demographic groups. It is crucial to refer
to the latest data and analysis from official sources for a comprehensive understanding of Canada's
current labor market conditions.

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Current Account Balance

Canada's current account balance reached a surplus of 0.9 billion US dollars in 2021, marking the
first since 2008. This was primarily due to a strong trade in goods and services, with a 2.1 billion US
dollars surplus in the first quarter of 2021. The trade surplus was driven by higher exports of energy
products, forestry products, and aircraft, while imports of gasoline and travel services declined.The
current account balance was $10.8 billion negative in 2022, up $4.1 billion from 2021. Despite this
increase, the deficit was the second lowest since 2009. The trade in goods surplus reached $22.0
billion in 2022, up $17.3 billion from the previous year. Total exports increased by $142.2 billion, led
by increasing exports of energy items due to price increases. Total imports grew by $124.9 billion,
with advances seen across all product categories. However, the increased goods surplus was more
than offset by a larger services deficit and an investment income balance that went from surplus to
deficit in 2022. The trade in services deficit increased as the travel balance returned into a deficit
position, reflecting the recovery of travel activities in 2022. The investment income balance turned
into a deficit in 2022 after two years of surpluses, primarily driven by higher payments of interest and
dividends on foreign holdings of Canadian securities. Despite this, profits on direct investment
reached record-high levels in 2022.

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Foreign Exchange Reserves

During the period from 2012 to 2020, Canada's foreign exchange reserves experienced notable
variations. Starting at $68.55 billion in 2012, the reserves saw slight declines in 2013 and 2014,
reaching $71.94 billion and $74.7 billion, respectively. However, in 2016, there was a significant
surge to $82.72 billion, followed by further increases to $86.6 billion in 2017. Although a slight
decline occurred in 2018 to $83.93 billion, the reserves remained relatively robust. In 2019, the
reserves decreased to $85.3 billion, but still maintained a significant level. In 2020, the reserves
rebounded to $90.43 billion, influenced by government interventions and measures taken to stabilize
the economy during the COVID-19 pandemic. As of May 2021, Canada's foreign exchange reserves
stood at $106.62 billion, with the reserves composed of securities, deposits, special drawing rights,
and reserve position in the International Monetary Fund. The main currency held in reserves is the
US dollar, followed by the euro, pound sterling, and yen. In June 2023, Canada's foreign exchange
reserves increased to $114,284 million, representing a rise from the previous month. The reserves
accounted for 3.857% of GDP in March 2023, reflecting an increase compared to December 2022.
Overall, Canada's foreign exchange reserves experienced fluctuations during the examined period,
influenced by various factors such as global economic conditions, commodity prices, monetary
policy decisions, and government interventions. These reserves play a crucial role in ensuring
stability, supporting the economy, and providing a buffer against external shocks.

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Part 2: GDP and its components

a. A domestic auto manufacturer sells a car from its inventory to the Nguyen family:
This economic transaction impacts the consumption component of GDP. It contributes to the GDP
growth as it involves the final sale of a new product. Therefore, the GDP experiences an increase.

b. A local city hires workers to plow snow after a snowstorm:

This transaction impacts the government spending component of GDP. When the local city employs
workers to plow snow, it counts as a government expenditure on goods and services, falling under
government consumption expenditure and gross investment. The wages paid to the workers are also
included in GDP calculation as income earned by individuals.

As a result of this transaction, GDP increases because government spending is a GDP component.
The money spent by the local city on hiring workers contributes to economic activity and adds to the
country's overall output.

c. Aunt Melinda buys a new air conditioner from a domestic manufacturer:

This economic transaction influences two GDP components: consumption expenditure and
investment. Aunt Melinda's purchase of a new air conditioner qualifies as consumption expenditure
since it involves buying a final good for personal use, contributing to overall consumption in the
economy.

Moreover, this transaction also impacts investment because it represents an addition to the country's
capital stock. Buying a new air conditioner from a domestic manufacturer indicates an investment in
the production and sale of the product.

Consequently, GDP increases due to this transaction since both consumption expenditure and
investment contribute positively to GDP.

d. Your parents pay an accountant to file their tax returns:

This economic transaction impacts the services component of GDP. When your parents pay an
accountant to file their tax returns, it counts as payment for services provided. The accountant's fee
represents income earned from offering professional services.

As a result of this transaction, GDP increases because it contributes to the overall value of services
produced within the economy.

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e. A car company manufactures a new car brand and adds it to its inventory:

This transaction influences the services component of GDP. When your parents compensate an
accountant for filing their tax returns, it constitutes payment for the services rendered. The
accountant's fee represents income earned from providing professional services.

As a consequence of this transaction, GDP increases due to its contribution to the overall value of
services produced within the economy.

Part 3: Monetary system

a)

Southeast Mutual Bank

Assets Liabilities

Reserves: $500,000 Deposits: $2,500,000

Loan: $2,000,000

b) When a new deposit appears, Southeast Mutual Bank will keep 20% following the required
reserve ratio. The excess reserves will be increased by the number of deposits minus the required
reserves.

c)

Southeast Mutual Bank

Assets Liabilities

Reserves: $500,000 Deposits: $2,500,000

Loan: $2,000,000

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Walls Fergo Bank

Assets Liabilities

Reserves: $400,000 Deposits: $2,000,000

Loan: $1,600,00

PJMorton Bank

Assets Liabilities

Reserves: $320,000 Deposits: $1,600,000

Loan: $1,280,000

d) Money supply = 1/R = 5

Overall increase= 5*2,500,000=12,500,000 in demand deposits

Part 4: Theory of Open Economy

Suppose the assigned country decides to subsidize the export of agricultural products, but it does not
increase taxes or decrease any other government spending to offset this expenditure. Using a three
panel diagram, show what happens to national saving, domestic investment, NCO, the interest rate,
exchange rate, and the trade balance. Also explain in words how this policy affects the amount of
imports, exports, and net exports.

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National saving: The Canada 's national saving will decrease because when the country purchases an
amount of money to subsidize exports, the government does nothing(they don’t increase taxes or any
other government spending) to compensate for this expenditure.

→ Therefore, the national savings will be decreased.

Domestic investment: The decrease in national saving shifts the supply curve in graph 1:market for
loanable funds to the left. The equilibrium point e1 shifts to e2(to the left). Therefore the demand for
loanable fund decrease. And D=I+NCO in that market. So the decrease in D cause domestic
investment decrease along demand curve in graph 1 from e1 to e2.

→Therefore, the domestic investment will be decreased.

NCO: NCO will decrease as D=I+NCO, decrease in D makes I and NCO decrease. Another
explanation is that: “When Canada exports more, foreigners will pay Canada domestic goods and
services, capital in Canada will be outflow causing NCO to decrease.(As NCO=purchase of foreign
assets by domestic residents-purchase of domestic assets by foreigners).

→ Therefore, NCO will be decreased.

The interest rate: r will increase as the quantity of loanable funds demanded decreases. (show in
graph 1: market for loanable fund)

The exchange rate: the exchange rate will increase as the supply of dollars decreases (the supply of
dollars represents for NCO in graph 3: the market for foreign-currency exchange rate).

The trade balance: As Canada subsidizes the export, so exports will increase which leads to the
increase in NX( Trade balance is NX, NX=E+I, E increases so NX increases).

So how this policy affects import, export, and net export?

When Canada currency appreciated, the foreign goods and services become less expensive for
domestic residents to purchase for, Therefore, people tends to import more which leads to the
increase in import.

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But when Canada currency appreciated, Canada goods and services become expensive , so Canada
goods and services become less attractive for consumers both at home and abroad, so the export of
goods and services from Canada will decrease.

The trade balance will decrease as now the export of Canada decrease and import from Canada
increase.

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Part 5: Aggregate Demand – Aggregate Supply

The stock market declines sharply, reducing consumers’ wealth.

Price level LRAS0

AS0

AS1

P0

P1

P2 AD0

AD1

Y1 Y0
Quantity of Output

In the short – run, reduction in consumer wealth is going to decrease consumption and to
decrease aggregate demand thus leading to a decrease in price level and output. The wealth of
consumers decreases as a result of lockdown since they are not working which will thus
decrease the consumption level. The aggregate demand will then decrease meaning that it will
shift to the left. The output will reduce from Y0 to Y1 and the price will reduce from P0 to P1
as the aggregate demand curve shifts from AD0 to AD1.
In the long – run however the output is going to return to the natural GDP level but the
price level will be lower than under the initial long – run equilibrium. The aggregate supply
curve shifts to the right, from AS0 to AS1, to restore equilibrium, with unchanged output and a
lower price level.

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The federal government increases spending on national defense.

Price level
LSAR0
AS1

AS0
P2

P1

AD1
P0

AD0

Y0 Y1 Quantity of Output

In the short – run, increased government spending will instantly affect the price and output
level instantly and positively. The increase in government purchases is going to increase the
aggregate demand thus leading to an increase in price level and output. The rise in
government purchases shifts the aggregate demand curve to the right, from AD0 to AD1 , the
output will rise from Y0 to Y1 and the price will rise from P0 to P1.

In the long – run however the output is going to return to the natural GDP level but the
price level will be higher than the initial long – run equilibrium. The aggregate supply curve
shifts to the right, from AS0 to AS1, to restore equilibrium. The output will not get affected as
the long-run aggregate supply curve will adjust the output, but the price levels may be higher
in the long run.

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References
Archived - Official International Reserves - October 5, 2021. (n.d.). Canada.ca. Retrieved

July 19, 2023, from https://www.canada.ca/en/department-

finance/services/publications/monthly-official-international-reserves/2021/10.html

Canada Foreign Exchange Reserves - June 2023 Data - 1953-2022 Historical. (n.d.). Trading

Economics. Retrieved July 19, 2023, from https://tradingeconomics.com/canada/foreign-

exchange-reserves

Canada Foreign Exchange Reserves: % of GDP, 1999 – 2023. (n.d.). CEIC. Retrieved July

19, 2023, from https://www.ceicdata.com/en/indicator/canada/foreign-exchange-reserves--of-

gdp

Canada Inflation Rate and CPI - June 2023 Update. (n.d.). WOWA.ca. Retrieved July 19,

2023, from https://wowa.ca/inflation-rate-canada-cpi

Canada Inflation Rate - June 2023 Data - 1915-2022 Historical - July Forecast. (n.d.).

Trading Economics. Retrieved July 19, 2023, from

https://tradingeconomics.com/canada/inflation-cpi

Canada Unemployment Rate - June 2023 Data - 1966-2022 Historical - July Forecast. (n.d.).

Trading Economics. Retrieved July 19, 2023, from

https://tradingeconomics.com/canada/unemployment-rate

Current account balance (BoP, current US$) - Canada | Data. (n.d.). World Bank Open Data.

Retrieved July 19, 2023, from

https://data.worldbank.org/indicator/BN.CAB.XOKA.CD?locations=CA

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The Daily — Canada's balance of international payments, first quarter 2021. (2021, May 31).

Statistique Canada. Retrieved July 19, 2023, from https://www150.statcan.gc.ca/n1/daily-

quotidien/210531/dq210531a-eng.htm

The Daily — Gross domestic product by industry, March 2023. (2023, May 31). Statistique

Canada. Retrieved July 19, 2023, from https://www150.statcan.gc.ca/n1/daily-

quotidien/230531/dq230531b-eng.htm

The Daily — Gross domestic product by industry, March 2023. (2023, May 31). Statistique

Canada. Retrieved July 19, 2023, from https://www150.statcan.gc.ca/n1/daily-

quotidien/230531/dq230531b-eng.htm

The Daily — Labour Force Survey, May 2023. (2023, June 9). Statistique Canada. Retrieved

July 19, 2023, from https://www150.statcan.gc.ca/n1/daily-quotidien/230609/dq230609a-

eng.htm

Gourinchas, P. (2023, April 11). World Economic Outlook, April 2023: A Rocky Recovery.

International Monetary Fund. Retrieved July 19, 2023, from

https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-

2023

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