Economic Impacts of the Following

¶ … economic impacts of the following on Canada

Impact of Inflation on the Canadian Economy

Regarded as an economic phenomenon, inflation is perceived as a generalized, long-term increase in the level of prices and a reduction of the purchasing power of the currency in the respective country. Inflation has significant effects over the economy and over the interests of all economic agents, over the social and political climate, and over international economic relationships.

The size of the effects depends on the intensity of inflation and on the status of each economic agent. Some clearly lose something, while others may find themselves to have certain benefits from inflation.

Some of the elements that represent direct effects of high inflation represent wealth redistribution, social convulsions, decreased living standards for certain categories, economic information may lose some of its value, decreased savings and investments, production losses, and increased unemployment rate. Regarding income redistribution, any price modification implies modification of incomes for at least two economic agents, therefore a distribution modification and another income configuration for the economic agents in case (Phelps, 1970).

In order to better understand the economic impact of inflation, it is necessary to present the current economic situation that characterizes Canada. The country is a high-tech industrial society, with a market-oriented economic system. Over the past few decades, Canada experienced continuous economic growth, becoming one of the most stable and secure economies in the world.

However, the economic and financial crisis did not leave the Canadian economy untouched. In 2008, Canada's economic growth was significantly slower than before. The most affected sectors are the housing and the auto sector. It is expected that public finances will deteriorate in the following period.

In 2008, Canada's GDP purchasing power parity reached $1.307 trillion, with a GDP real growth rate of 0.6%. GDP growth rate reached 2.7% in 2007 and 3.1% in 2006. The unemployment rate reached 6.1% for a labor force of 18.18 million. Public debt reached 62.3% of GDP (CIA, 2009).

Inflation reached 1% in January 2009, but global macroeconomic conditions might determine an increase of inflation's level. However, the ideal inflation level is 2%, which means Canada's economy might benefit from an inflation increase, depending on its level.

Bank of Canada's policy is to target an inflation rate between 1-3%. The ideal pursued scenario involves a 2% inflation rate, which is considered to be core inflation for Canada.

But Canada has not always been in this monetary situation. Over the past decade, the country experienced several types and levels of inflation. Obviously, each of them had different repercussions on the country's economy.

Between the 1970s and the 1980s Canada's inflation was high and unstable. The impact consisted in significantly large and rising public deficits and debt. These were unsustainable at that point. The matter caused future economic turmoil and instability.

But things took a different turn since 1990s. The country's monetary policy started to focus around an inflation-control target. But controlled inflation was not enough. The situation had to be backed by a flexible exchange rate.

The economic impact of these measures was direct and quite rapid. The measures created a basis for economic stability, which led to economic development, a process continuously sustained, leading to the developed Canada of today.

High inflation and large deficits had a significant impact on Canada's economic capabilities. During the periods characterized by high inflation Canada's economy was a very unstable one, but not necessarily traversed by negative periods only.

Instead, during this period, Canada's economy was experiencing growth periods alternated with set-back periods. The same thing was observed regarding the country's employment. These issues are considered to be exaggerated.

Also, high inflation had another economic impact that consisted in the fact that it wasted "valuable economic resources -- resources that ought to be going into productive uses, but are instead diverted into hedging, as people seek protection from rising inflation" (Dodge, 2002).

This means that important sectors of the Canadian economy were deprived for long periods of time from important funds that might have produced accelerated development. This would have generated sustained economic growth, allowing Canada to reach much sooner the present economic status.

Even more, high inflation attracted large budget deficits. In order to cover them from one fiscal period to another, a great part of Canada's national savings had to be directed towards this direction. The effects consisted in public debt accumulation, which in turn led to increased risks in the country's interest rates.

And the chain of effects did not stop here. The situation continued with discouraged investments, especially where equipment and technology were concerned. This is a very important aspect, because of the fact that these factors directly influenced productivity.

In other words, without massive and continuous investments in equipment and technology, productivity cannot be improved. If productivity does not reach satisfactory levels at least, the general economic situation cannot improve. As a consequence, individual economic situation cannot be a satisfactory one either.

Even if matters seemed to be clear from this point-of-view, it took a while until Canada came to implement its current monetary policy that focuses on maintaining a small inflation rate. The country experienced different types of monetary policies, each of them having different impact on the country's economy.

It was not until 1988 that the Bank of Canada's Governor at the time realized that in order to diminish the negative impact on the country's economy the monetary policy has to consist in reducing the inflation level. The direct effect of reducing inflation consisted in achieving price stability.

Since that period, the country focused on implementing policies that were designed to reduce inflation and to maintain it at a low level. The measures that were taken during that period proved to be very efficient, given the fact that by 1992 Canada's inflation reached almost 2%.

Even so, the impact of the reduced inflation level was not a rapid one. The impact started to be noticeable after a slightly longer period of time because of the fact that the damage produced by high inflation rates was too strong to be counteracted on such a short period of time.

As a consequence, high interest rates were still maintained for a period of time, even if inflation had been reduced. But the government and the Bank of Canada were not the only agents involved in the country's economic recovery. Population played a very important role also.

The fact that the country's inflation was a low and predictable one has helped Canadian to make better economic plans for medium term and long-term. This was not previously possible, during the times with high inflation and unstable economic environment. This has had a positive impact on the level of savings and investments.

This type of inflation increased the level of credibility in the monetary policy. This way, temporary changes regarding energy prices or exchange rate modifications do not affect other prices and wages in the same manner as these factors would be affected in a high inflation economy.