Chapter 6 - Determination of National Income

Article: http://www.vancouversun.com/business/fp/story.html?id=1369776

Summary:
Housing starts dropped last month as the Canadian real estate market continued to weaken amid a deepening economic downturn and high unemployment. "Increased listings and reduced sales in the existing home market continue to impact the new home market," said Bob Dugan, CMHC's chief economist. With increased listings and reduced sales, urban construction fell 14.9% to 107800 units in February, with multiple starts falling 17.5% to 63,300 and single-unit activity dropping 11% to 44500. The decline in urban construction was felt in all regions of Canada, except Atlantic Canada where starts rose by 10.8%, CMHC said. The biggest declines were in Quebec, down 19.6%, Ontario, off 14.4%, the Prairies, 19.4% lower, and British Columbia, down 12.8%.

Connections:
In Chapter 6, we learned the relationship between household savings and investment. With the current economic situation, households’ incomes are reduced. They are first reaction is to cut bake spending, which is logical but doesn’t help to solve any problems. As household reduce the flow of income going to the business sector, in turn, business cut back production and lay more workers off. With less money available, households are likely to cut back on their spending even more. Therefore, business spending decease, which means less investments and GDP, falls. As GDP falls, not only unemployment rate will increase, but also lead to other problems like security problem and consequence would repeat itself. According to Keynesian economic theory, if government take an active role in the economy by increasing government spending, it will support the demand for goods and services and, therefore, to preserve employment.

Reflection:
From looking at this article, I realize that the housing sector may remain a key source of drag to Canadian economic activity. With such low mortgage rate, I think consumers should consider buying houses. As mention in the article, with increased listings and reduced sales, business reaction is to reduce constructions. Therefore, the unemployment rate will increase even more. On the other hand, if the government funds the construction, consumers are getting their jobs. As a result they have more money to spend; this will eventually cause more money flowing into the circular flow of the business side. The extra money received by companies would spend on investments, in turn, increase their payments to households. SPENDING IS ESSENTIAL TO GET RID OF THIS SITUATION.