To all the dedicated followers of our Junior Economist:
It is a great pleasure to announce the launch of our Curriculum Series on the Junior Economist. In the past few months, our team of writers and editors have produced a plethora of articles ranging from leadership and personal development advice, to editorials on political and financial news, to recaps of our latest event successes.
Our goal with the Curriculum Series is to provide readers with a student perspective on the basics of business, often highlighting many of the same values and principles discussed at our events. Through this initiative we hope to spread the outreach and impact that our Junior Economist provides to students from across Ontario.
We look forward to hearing your feedback.
Robert Di Marco
Basic Investment Definitions
What is investing?
Investing is the act of committing money to an asset or endeavor with the expectation of gaining profitable returns. Let’s explore the different types of investments one can make:
1. Guaranteed Investment Certificate (GIC)
A GIC works like a savings account in that you deposit money into it and earn interest on that money. However, people typically earn more interest on a GIC than they would in a savings account, because you cannot withdraw any money from a GIC account for a specified amount of time. When you invest in a GIC, you are basically lending your money to the bank or financial institution for a certain number of months or years, and are guaranteed to get this money back, with interest, at the end of the term. It’s important to note that if you take your money out before the term ends, you may have to pay a penalty. GICs can have either a fixed or a variable interest rate, and in general, the longer the term, the higher the interest rate you will earn.
A bond is basically an I.O.U. between a lender (the bondholders) and a borrower (the bond issuer). The bond terms, such as the date by which the issuer must pay back the money (the maturity date), and the interest rate/payments (the bond yield) which the issuer must pay on top of the principle, are all formally decided beforehand. Safer bond issuers demand lower yields; since treasury bonds are about as safe as you can get, they come with a very low yield. On the other side of the spectrum are junk bonds which come with the highest yield bonds since their issuers are the most likely to default on their loan.
A stock is a type of security that represents an ownership share in a corporation. When a person purchases a stock, he/she becomes a shareholder who is entitled to a proportion of the corporation’s assets and earnings. Corporations sell stocks (usually on stock exchanges) to raise money to operate their business. People invest in stocks of companies which they think will go up in value, and sell those stocks to earn a profit. Investing in stocks is considered risky because if a company begins to experience bad conditions, the value of its shares can fall below the value for which people purchased them, and investors are at risk of losing part of, or even their entire investments. At the same time, stocks are also known for having outperformed most other investments over the long run.
4. Mutual Fund
A mutual fund is made up of a professionally managed pool of money collected from a set of different investors, to invest in securities such a stocks and bonds. Unlike the stock market, in which investors purchase shares from one another, mutual fund shares are purchased directly from the fund or a broker who purchases shares for investors. Mutual funds are handled by one or more portfolio managers who invest the money in a number of different securities in order to achieve income or capital gains for the fund’s investors. Each shareholder participates proportionally in the gains or losses of the fund.
5. Exchange Traded Fund (ETF)
An ETF is an investment fund that allows you to buy a number of different stocks or bonds in one purchase. The main difference between an ETF and a mutual fund is that ETFs are traded on stock exchanges, and have lower fees since you’re not paying fund managers would actively manage your money by buying/selling stocks and bonds, and by responding to fluctuations in the market.
The Future of Accounting
The professional body of more than 210 000 accountants is now represented by a single national body being the Charterer Professional Accountants of Canada (CPA Canada). This globally recognized designation. A merger in 2013 unified the profession- bringing together more than 40 accounting bodies across Canada with the merger process set to be complete by 2022. Accounting is a profession which many foresee to change in a dynamic way as the advent of technology is set to take industries by storm in the coming years- leading many accounting hopefuls to contemplate their career relevant decisions.
It’s important to understand, and believe, machine learning, artificial intelligence and robots are not going to replace all accountants or the industry as some speculate. White collared professions and workers are an important part of our economy and in broad- our society. What should be expected though, is for improvements and efficiencies to take the industry by storm. Further implementation of smarter and more innovative technology won’t eliminate the need of an accountant- rather alter their day to day duties and contributions in their workplaces. As machine learning and AI eventually take over mundane and repetitive tasks of accountants this will allow these professionals to use their skills to be more productive in the workforce.
Skills accountants hold are still valuable in many dimensions across various industries- due to the nature of their jobs, accountants are detail-oriented and objective with strong problem-solving within time sensitive issues.
Technology being implemented in this industry is inherently a good thing as small time consuming errors are eradicated, in addition to reducing the possibility of possible fraud. Ultimately, its important to have accountants as they are best in the interpretation of their work, with ratios and figures prepared and presented in board rooms to make imperative business decisions. One of the most noticeable changes thus fur in accounting has been cloud services. Accessibility and online automation are allowing for accountants and workers worldwide to have instantaneous access to various spreadsheets, tables, figures and reports quicker than ever maximizing efficiency. Bots and automated entries also allow for better and more accurate categorization of account entries- allowing for further analysis in later stages to find operational efficiencies. Machine learning can and does learn fro human input and makes better judgement to adapt to accounting professionals’ behaviour. Currently though, any work done through AI or machine learning is to be reviewed by accountants-keeping control of sensitive information.
The implementation of technology into the industry has not been unified- meaning the exposure to AI is different not just across the world but even just across the street as different divisions within single firms vary in their innovation and addition of new technologies. Accounting is still though a solid and viable field to get into and isn’t going away anytime soon. As entrepreneurs and start-ups continue to increase year by year, more accountants are being employed and hired than before as every business needs these professionals in a multitude of ways.
Job prospects are projecting the field and need for these professionals to grow even more in coming years according to The Bureau of Labor Statistics in the US, forecasting a 10% growth in the industry by 2026- a rate faster than national US averages for all occupations. Accounting is still a great future with potential as its not simple bookkeeping, not anymore at least. A recent grad may begin as an entry level associate however with professional designations and possibilities to grow with companies and firms, the fundamental knowledge of accounting can lead to great and rewarding careers for prospectives.
The process of price determination can vary depending on the type of market in which the product is being sold.
In order to understand the basics, it’s best to first analyze how price determination works in a perfectly competitive market. Though there aren’t many current examples of such a market, the perfectly competitive market structure is what economists use as an “ideal structure”. If a market is said to be in perfect competition, it means that no single consumer or producer has a higher level of influence in that market, than any other consumer or producer. Furthermore, in a perfectly competitive market, all consumers and producers are price takers.
This means that all firms are forced to sell their products at the going market price which is determined by the forces of supply and demand (See Figure 1). The equilibrium price of the market supply and demand curves, is the price at which the producers in that market must sell their product.
The demand curve for each individual firm in a perfectly competitive market is perfectly elastic (See Figure 2), and this means that while each firm cannot decide the price at which to sell, they can decide upon the quantity to produce.
The profit maximizing amount to produce in this type of market, is the point at which marginal revenue is equal to marginal cost (See Figure 3).
Although the above describes the fundamentals of price determination, these principles are commonly deployed across all business sectors.
The Economic Cycle
In business, we often hear several coined phrases and terms; broadly referring to the ups and downs (fluctuations) in any free-market economy over a period of time. These phrases, fluctuations and phases are all apart of the business cycle, often referred to as the economic cycle. Comprised of four stages-expansion, peak, contraction and trough; the economic cycle is a boom and bust cycle which reflects inevitable patterns in our market economies; generally being a measure of change in the measure of GDP.
Understanding this cycle is paramount, we all live through the economic cycles and as a society; it affects our consumerism and economic activity as a whole. A thorough understanding of the cycle not only prepares members of society as active segments in an economy- it allows for sound investment decisions and financial planning, in the corporate world; the economic cycle and it’s major indicators impact the decisions which are undertaken in board rooms around the world every day.
The expansion phase generally occurs between the trough and peak- reflecting economic growth. This is the point where the GDP of a nation is growing- reflecting the expanding economic output of a state. Unemployment reaches a low rate with inflation meeting targets; in large-developed market economies, this rate is roughly targeted to be 2%. Financial markets are also favourable- with other economic metric favouring investment; the stock market in this phase is increasing in price and suggests growth prospects for investors with different variances and ojectives. The expansion phase generally reaches it ends when the GDP growth rate greatly exceeds expectations combined with a higher level of inflation- the end of this phase sometimes supports irrational exuberance, a point where investor enthusiasm in assets appreciating and increasing in value not supported by fundamental objectives. It is important to note though; analysis of long term cycles indicate expansions lasting longer than contractions as growth is expected in the long term in a healthy and growing economy.
Next, is generally a short phase or single point in an economic trendline referring to the transition between the 1st and 3rd phases of expansion and contraction. The peak occurs at a period where asset bubbles begin to accumulate as inflation levels elevate prices and cost. This is followed by contraction. An economy has finite resources, eventually; increased demand for limited resources and limited production lead to increased prices; this results in a decreased output and less spending. At the peak, the value of GDP reflects the point of short-term maximum value.
As the price to produce goods increases in addition to inflation hindering the buying power and real market value of a currency. As demand decreases in addition to input, prices fall and this is a contraction in the GDP- reflecting a time where the GDP decreases. This process is cyclic-re[eating itself as lower prices eventually increase market demand with functions and components of economic theories such as the Invisible Hand being reflected.
If the GDP falls for consecutive quarters, it’s referred to as a recession. In more rare and extreme situations which can have long term, wide-spread implication; a prolonged period of contracting GDP is referred to as a depression. During this phase, unemployment rises- usually not until the tail end of the phase as unemployment rates are considered lagging indicators as they usually follow an economic event. Rising unemployment rates reflect poor economic performance. Financial markets tend to enter a bear market where share prices fall as investors continue to sell.
The trough-like the peak represents the point of change, where the economy hits its bottom and begins to go on an upswing (expansion).
Overall, this cycle is greatly influenced and managed by government deploying fiscal policy which is often vital to recover or end a recession. Generally, central banks use their monetary policy at particular times, at the trough, rates are lowered to support expansionary monetary policy to support business, investment and in broad economic growth. The Keynesian approach to economic theory and understanding argues changes in demand, encouraged by instability and volitility in investment cycles being the core/root in the generation of these cycles. Other theories suggest this cycle as there is no such thing as equilibrium, causing an economy to naturally shift across a range and spectrum of disequilibrium leading investors to over/under-invest as manufacturers to over/underproduce to try and accommodate the change in consumer demand.
The business cycle, its implications and understanding can provide important insights which can be applied in all economic sectors allowing one to understand the world, community and economy around them in which they participate.
Supply, Demand, and Market
Supply and demand is one of the most important concepts in economics. In simple terms, demand refers to the quantity of a product or service that is wanted by consumers, whereas supply refers to the quantity of a product or service that the market can offer.
In this article, we will explore the roles of supply and demand, their relationship, and how the two forces drive the way people allocate resources in the economy.
Demand refers to the relationship between the price of a good and the quantity of the good that consumers are willing to buy at each price. In this relationship, the price is the independent variable. The dependent variable is the quantity demanded, which refers to the amount of the product consumers are willing to buy at each price.
The Law of Demand
The law of demand states that the higher the price of a good, the fewer people will want that good. More formally, as price increases, quantity demanded decreases. When working with this law, we assume ceteris paribus—that all other factors affecting price and quantity demanded are held constant. The relationship between price and quantity demanded is displayed in the demand curve, as illustrated in Figure 1.1.
To draw the demand curve, place price on the vertical axis and quantity demanded on the horizontal axis. Note that, unlike in typical mathematics, the independent variable is on the y-axis instead of the x-axis. This may be a bit confusing at first, but it is accepted as a convention in economics. If you have drawn the model correctly, the demand curve should have a negative slope.
The demand curve’s negative slope is indicative of the law of demand; as the price of a good goes up, the quantity demanded goes down, and vice versa. This is an example of a change in quantity demanded, which is represented by a movement along the demand curve.
For instance, as the price of apples drops from $3.00 per kilogram to $2.00 per kilogram at your local grocery store, you might go from buying 4 apples per month to 6 kg of apples per month. This change in quantity demanded is represented by a movement from one point on the demand curve to another, as shown in Figure 1.2.
Market demand refers to the sum of all consumers’ purchases, or quantity demanded, at each given price. While you purchase 6 kilograms of apples per month at a price of $2, your neighbour might purchase 10 kilograms per month at the same price. When considering what both of you are able or willing to pay at $2, the total quantity demanded is 16 kilograms of apples per month. In this case, the market demand is therefore 16 kilograms of apples per month for apples priced at $2 per kg. As we repeat this procedure of summing the quantities demanded at every possible price, the resulting market demand curve will shift outwards.
Supply refers to the relationship between the price of a good and the quantity of the good that businesses are willing to sell for each price. In this relationship, the price is again the independent variable; however, the dependent variable is now quantity supplied. Quantity supplied refers to the amount of a product businesses are willing to supply at each price. As with market demand, market supply is the sum of all producers’ quantities supplied at each price.
The Law of Supply
The law of supply states that, as the price of a good increases, the quantity supplied increases as well. We must also assume ceteris paribus when working with the law of supply. The relationship between price and quantity supplied is shown in Figure 2.1.
The supply curve’s axes are identical to the axes for the demand curve. Unlike the law of demand, however, the law of supply shows a positive slope. This is because businesses want to sell more of their products when prices are high, since selling high quantities of a good at high prices results in increased revenue.
As with the demand curve, a change in a product’s price causes a change in quantity supplied. However, in the case of supply, an increase in price causes an increase in quantity supplied. This is represented by a movement along the supply curve.
For instance, as the price of apples drops from $3.00 per kilogram to $2.00 per kilogram, businesses might go from selling 9 million kilograms of apples per year to selling 16 million kilograms per year. This movement along the graph is shown in Figure 2.2.
3. Supply and Demand Relationship
In the marketplace, supply and demand work behind the scenes to coordinate the decisions of buyers and sellers. Quantities demanded and supplied are driven to a point of stability by changes in price. This point of stability is called the market equilibrium, where the supply and demand curves intersect.
The market is said to be at equilibrium when supply and demand are equal. At this point, the allocation of goods is at optimal efficiency, because the amount of goods being supplied is the same as the number of goods being demanded by consumers.
Whenever the market is out of equilibrium, changes in price compel the market to right itself and achieve equilibrium. If the price of a good is too high, the quantity supplied exceeds the quantity demanded, resulting in a surplus of goods. If the price is too low, the quantity demanded exceeds the quantity supplied, resulting in a shortage of goods. Both these conditions force the market back to equilibrium.
Surplus of Goods
A surplus of a product forces its market price down towards an equilibrium price. Since the good’s quantity supplied exceeds its quantity demanded, this means that suppliers are selling way more than consumers are buying. In response, some suppliers cut their prices and others scale down production. As suppliers cut prices, the market price falls towards its equilibrium. The falling price decreases the surplus because it increases the good’s quantity demanded and decreases its quantity supplied—until quantity demanded is equal to quantity supplied. At that point, there is no longer a surplus. The forces moving the price stop operating and the price comes to rest at its equilibrium.
Shortage of Goods
A shortage of a product forces its market price up towards an equilibrium price. Since the good’s quantity demanded exceeds its quantity supplied, this means that suppliers are not selling enough to satisfy the buyers. Hence, suppliers aren’t earning an optimal amount of income, as they are not selling to all the consumers who want to purchase their goods. In response, some suppliers raise their prices whereas others increase their output. As suppliers push the price up, the price rises towards its equilibrium. The rising price reduces the shortage because it decreases the good’s quantity demanded and increases its quantity supplied—until quantity demanded is equal to quantity supplied. At that point, there is no longer a shortage. The forces moving the price stop operating and the price comes to rest at its equilibrium.
Basic Economic Models and Foundations
Basic Economic models
We can define the term economics as the transfer of wealth within a defined society. In Economics, we can place the most commonly seen and used economic models into perspective in a way so that they contrast and provide distinct properties from one another—distinct enough so that we understand their respective outcomes, sacrifices (and there are always sacrifices), and shortcomings. In the study of theoretical economics (emphasis on THEORETICAL), many assumptions that do not nessasaility reflect real world values are introduced, assumptions such there are only two different products in competition, or that consumers have unlimited and unrestricted access to marketing information, or that anything and everything is rational and equal—ceteris paribus.
Scarcity is the situation in which available resources, or factors of production, are finite, whereas wants for such resources, are infinite. There are not enough resources to produce everything everyone wants, so economics deals with the plans and methods to make sure what we do have is allocated to highest efficiency. Resources can also be known as factors of production, and can include things like human labour, machinery, and factories, or “gifts of nature”, such as agricultural land, and metals underground. By studying economics, we are trying to find out:
What to produce
How to produce
For whom to produce
Four factors of production
Economists group factors of production under four categories:
Capital (different from accounting capital)
The word capital has several meanings amongst different studies. In Geography, it might mean the most important city or town of a country. In law, it might mean execution as a punishment. In accounting, it might mean assets needed by a company to provide goods or services, as measured in terms of money value. In economics, capital is, in the most general sense, resources that can produce a future seam fo benefits. This may be physical capital (four factors of production), human capital (skills, abilities, and knowledge of the people), natural capital, or financial capital.
Opportunity cost is defined as the value of the next best alternative that must be given up in order to to obtain something else. For Example, when a consumer spends $100 on shoes, that consumer is giving up the opportunity to spend that $100 on something else, such as books. That lost opportunity is the opportunity cost.
Productions possibilities model
One of the most basic models in economics, the productions possibilities model/curve (PPC) is the curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.
Depending on the costs of resources each respective resource requires for production, the curve varies accordingly. Looking at the chart above and suing the classic example of guns and butter, we see that should we produce more butter, we must decrease the amount of guns we can produce, making the two quantities meet at point C, and vice versa, at point B. If the amount of guns produced where to equal that of the butter produced, the two quantities would meet a more or less central point, point D, in this case. The condition of scarcity would thus not allow the economy to produce outside of the PPC, because it does not have enough resources.
It is important to know that this is all theoretical. For this model to exist, two conditions must be met:
All Resources must be fully employed
All resources must be used to maximum efficiently
In reality though, it is nearly impossible for any economy to produce on its PPC, and will most likely do so at a point such as A, as there are a multitude of factors such as resource waste that would prevent maximum efficiency.
The above diagram, where the PPC (yes, it's still a curve even though its straight) is straight, meaning that the change from one produced produced to another is a constant change. For example, in the second diagram, for every 10 butter we produce, we are giving up 25 guns that we could’ve used the resources to produce. On the other hand, for the first diagram, because the PPC is curved, a 10 butter increase might mean only a 1 gun decrease near the top of the curve, but at the bottom, a 10 butter increase could mean a 35 gun decrease. The change isn’t constant.