Question

• How do you expect COVID-19 to affect Economic Growth: for Canada and for the World in general?
• Budget Deficit in light of COVID-19: What it means for Canada?

Answer 1

Introduction

The Covid 19 Pandemic has become one of the largest headaches for economists and countries alike because of the deep recession that it has thus resulted in. Most countries have experienced a serious decline in the gross domestic product which is the value of final goods and services produced in a country. This is because of the fact that the aggregate demand for goods and services is low as people stay indoors to prevent themselves from catching the disease. Due to this, the price of goods and services is falling as suppliers are making significant losses and are forced to sell their products for a lesser price just in order for them to clear inventory.

The concept has been explained in detail in the following section:-

Case Details:-

Impact on Canada & The World:-

The Covid 19 Pandemic has created havoc for the economy of Canada which was considered to be a developed nation. The country is experiencing slow growth to the tune of 20-30% in each quarter and has reportedly seen a great degree of long recession which was unheard off in the past.

As people remain confined to their homes, the aggregate or total demand for goods as well as services has shrunk very bad. As producers further make significant losses, unemployment has risen to all time high levels of as much as 13.5% as reported in the month of May 2020. This has further dampened the income levels of people and their purchasing capacity. Even though, the government has tried its best to control the situation with stimulus packages, yet the fact that people are sceptical about moving out of their country is one of the biggest reasons for a deep recession with negative growth rate being reported at 38.7% in the last quarter by the OECD or "Organisation for Economic Co-operation and Development"

Key industries which have seen a great degree of slide are those like education, tourism, agriculture, manufacturing etc all of which are linked to the fact that people are sceptical about moving away from their homes and as a result production as well as consumption is at its lowest levels. For example, agriculture industry in Canada thrived on migrants who would come into the country on a seasonal basis and would stay for a few months and grow crops. Most agriculturers which were dependant on these migrants were unable to produce any crops on their land and their worry grew despite government subsidies which were anounced to counter the problem with most of them even filing for bankruptcy.

When we look at the world in General as well, almost all developing as well as developed countries are encountering the COVID virus and have seen a rapid fall in consumption of most goods and services. This is because people are sketpical about roaming in public. Most industries have seen a downfall and layovers have become extremely popular as companies are unable to generate suitable profit margins for themselves. The following graph will help in understanding the same from both a canadian perspective as well as that of the larger world.

In the above graph we see that the aggregate demand for goods and services declined from Initial Quantity to Reduced Quantity. The equilibrium also shifts to the left from Initial Equilibrium to New Equilibrium and the price also falls down significantly. All of this ultimately results in lower demand.

It is to be noted, that in the graph, the demand curve is downward sloping, because of the fact that at lower prices the demand is higher. Similarly, the supply curve is upward sloping, because at higher prices profits and therefore supply is higher.

This graph can be used to explain the recession both in Canada as well as the rest of the world wherein slow demand has resulted in slow output and increased unemployment.

Impact of a Budget Deficit:-

A budget deficit refers to a situation wherein the governments expenses increase and go up and beyond their revenue sources. Due to the Corona Virus Pandemic, the Government of Canada, as well as that of numerous other countries has had to spend more money than they would earn during a year as tax collections are low and public sector units have also made significant losses over a period of time.

This then means that the government has to procure debt from within the country by issuing bonds as well as from outsiders which come at a higher interest rate. As the government pays a higher interest rate, we risk that in the future, tax rates would be very high to pay off debts which the government is encountering today.

Another problem is that international investor confidence as well as currency exchange rates for countries with a higher budget deficit are usually also on the higher side. This then means that imports would cost higher for this country and companies would be reluctant to invest as the risk of default would be higher.

For example, if the currency exchange rate falls by 10% in comparison to US dollar, then Canada would have to pay 10% extra to avail the same services or goods which it earlier used to consume for a lesser price.

Please feel free to ask your doubts in the comments section if any.