General Overview of the Canadian Economy

General Overview of the Canadian Economy

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General Overview of the Canadian Economy

Canada has experienced a consistent growth since 1991, which has led to its status as the world’s 8th largest economy with a GDP (Gross Domestic Product) of over $1 trillion (in 2006).

Canada’s economy is usually characterized as resource based. This qualification stems from the fact that the early development of the economy heavily depended on the export of natural resources. Today a big portion of the GDP comes from the service sector. The high development of this sector comes from the trend toward business subcontracting.

Additionally, Canada represents one of the world’s biggest producers of gold and oil. Some provinces still heavily depend on manufacturing and resources.

The advancement of the Canadian economy was triggered by the Trade Agreement of 1989 as well as the depreciation of the Canadian currency toward the USD.

The economy was boosted thanks to the elimination of a number of trade tariffs. This greatly facilitated and strengthened the country’s trade relations with its neighbors. Trading between the US, Mexico and Canada was furthered by the North American Free Trade Agreement.

Bank of Canada (BoC)

The central bank of Canada is the Bank of Canada (also known as the BoC). The entity responsible for the setting of monetary and fiscal policies is the Governing Council of the Bank of Canada. It consists of the Governor and additional six Deputy Governors. Meetings are held daily, which means that new policies are expected at any time.

The major goal of the BoC is to keep the integrity and the currency’s value. The major tool that is applied for the achievement of this goal is price stability. This is done through the sticking to particular inflation levels that have been set by the Department of Finance.

High inflation rates are viewed as a potential threat to the proper economy operations. On the other hand, low inflation rates are targeted since they are viewed as good for the economic conditions and growth. The major tool applied for the control of inflation rates are short term interest rates.

Thus, if inflation rates greatly exceed the set target, then the BoC will aim at more strict monetary policies to counteract them. Alternatively, lower inflation rates lead to less tight monetary policies.

The Monetary Conditions Index is applied for the purpose of assessing monetary conditions and measures the effect the monetary policy of Canada has on the economy through changes in the exchange rate and interest rates. It is estimated as the changes in the 90-day commercial paper rate plus one third of the exchange rate changes (expressed in percentages) of the Canadian dollar against the currencies of Canada’s six major trading partners, each with a different weighting.

In order to achieve the desired monetary policy, the BoC will exert influence on exchange rates by changing the Bank Rate. A decrease in the interest rate will be applied by the BoC if the currency appreciates above particular levels. Alternatively, interest rates will be increased if the currency falls in value. Still, the major purpose for changing interest rates is the control over inflation levels.

The BoC typically applies the following strategies in order to successfully implement a monetary policy:

  • Changes in the Bank RateThe Bank Rate represents the rate that is applied in order to put inflation into reasonable limits. Commercial banks are liable to this rate when they borrow money from the BoC. A change in this rate has a chain effect on other interest rates, which will have a further result on the whole economy’s conditions.
  • Application of Different Open Market OperationsThe monetary policies are implemented within the Large Value Transfer System (LVTS). The LVTS represents the system within which commercial banks in Canada execute borrowing and lending transactions among themselves. These are needed so that they can make their daily operations. The overnight rate (also known as the bank rate) represents the interest rate to which these banks are liable for the execution of such overnight loans.These rates can be manipulated by the BoC whenever the overnight lending doesn’t fall within the reasonable limits.

You should pay special attention to the announcements and reports the BoC issues. One of them is the Monetary Policy Report. It includes information on the current economic conditions as well as expectations for inflation levels.

Additionally, you should examine the Bank of Canada Review on regular basis, because it provides economic commentary, different articles and announcements as well as speeches made by members of the Governing Council on important issues.

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