Monday, April 13, 2020
Income elasticity of demand
After Covid-19
While Covid-19 has shut the world economies down, destroying trillions of wealth in the process, knowledge of income elasticity can help us answer the question; what next? What will the next twelve to eighteen months look like?
We know that national income has decreased? Similarly GDP per capita? The world may face as bad as a depression, pull back in growth for sure over the next two quarters...so a recession for sure.
So what should companies do? Should companies such as Apple roll out their next generation of products? What adjustments should companies such as Toyota make in their product offering? Should they change the production ratio of the vehicles they produce high end (luxury type) versus their more inferior brand.
What should countries such as Canada do? As national incomes are falling due to Covid-19, what impact will this have on Canada's export revenue?
For the Canadian businessman, what pockets of opportunities may exists for foreign direct investments? Should they look for opportunities in Less Developed countries or in Developed countries. We know that income elasticities vary between high and low income groups and more significantly between high and low income countries. How is this information useful to the decision maker?
From the government perspective, how might covid-19 influence the income gap in Canada? In the short term, medium term and long term?
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Initially, we all have an eagerness to have more of something better or of higher quality. Therefore, when our income increases, we have an opportunity to fulfill that eagerness and put it into practice. However, when it comes to clothing or food, we do not necessarily crave for more, but crave for better. This means that consumers will buy the same amount of food or clothing, but buy higher quality or more expensive products. Income doesn't necessarily affect how much we can eat or how much we can wear, but rather how good we are willing to eat or how nice we are willing to wear.-JAMES WONG
ReplyDeleteTo add on, I believe that non-essential companies such as Apple may need to hold on producing new products as it would be unnecessary or even a burden to society, but they should continue their support online if there are any problems regarding older models. I believe that car companies are considered essential, so I think they should still provide cars to people. The only thing is they might have to lower their supply as they would obviously expect a lower demand, and would also need to change their selling tactics. This could include not allowing more than a certain amount of people in a dealership at a time, no touching cars, having a VR interior view of the car, etc. All of it should reduce the amount of contact on any surface.
DeleteFurthermore, as income decreases, Toyota may have to increase the amount of inferior type cars. Since the average income has drastically decreased, less people would be willing to pay for a high end car which does the same job as an inferior car. At crucial times like these, people may stop being materialistic and start focusing on cheap things that will do the job. Thus, there will be an increase in quantity demanded for inferior type cars.
DeleteI agree with James because now that the national income has decreased, people will start to switch their expenditure from luxury goods, which they can no longer afford, to inferior goods. So, Toyota should produce less of the superior car type and more inferior cars.
DeleteChristie Lou9:54 AM
ReplyDeleteLuxury goods such as personal trainers or private gym memberships have a much higher YED because the demand increases significantly as income rises. This is due to the fact that as people's income levels are higher, once they have satisfied their basic needs, they start consuming non-essential goods in greater amounts. On the other hand, the demand for necessity goods will change very little with an increase in income as people will only consume as much as they need, which is why goods such as food and clothing have a relatively low YED.
Cara YuApr 13
ReplyDeleteThey're both necessity goods so a change in the consumer's income causes a proportionately smaller change in quantity demanded. This is because people with a lower income will prioritize those goods so they will continue to purchase the goods despite their little income as they need them in their everyday lives. As income increases, the demand for the goods does not significantly increase because their needs for those goods are already satisfied and consumers will only consume what they need of the good.
Derrick CuiApr 13
ReplyDeletesince food and clothes are a necessity (people only eat 3 meals a day regardless of income), when income increases, the percentage increase of quantity demanded of food and clothes will not increases more than the percent increase in income.
Seethaa ManoharanApr 13
To add on to Derrick's point:
As we can see through the table and by understanding how income elasticity of demand is calculated, the YED is significantly higher for non-essential, luxury products than it is for necessities. Products with a high YED are usually "wants" that people begin to indulge in as their income increases. Necessities like food and clothing have fairly constant demand because everyone needs them. Although different types of food/clothing can vary greatly in price, the demand for those items in general is not greatly impacted by a change in income.
I agree with both of your comments saying necessities will have a lower YED, and I especially agree with Seethaa's point of "Although different types of food/clothing can vary greatly in price, the demand for those items in general is not greatly impacted by a change in income". It is true that the quantity demanded for each individual food or clothing item changes because of the varying prices and reputations, but in general it is not impacted since it is just an exchange of demand.
DeleteMichelle Hu11:39 AM
ReplyDeleteFood, clothing, and footwear are all necessity goods. They are products consumers will buy regardless of changes in their income level because they are required in people’s daily lives. They have a low income elasticity of demand because as income increases, individuals will still purchase only what they need for these goods and will devote a lower percentage of their total income to these necessity goods. For example, staple foods, such as bread, are purchased by consumers at every income level because it is an important element of many people’s diets. Any change in income would not greatly affect the quantity demanded of bread.
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DeleteAngus Lau12:15 PM
ReplyDeleteFood & clothing are necessities (food for survival, clothing for public decency - a need in human lives) so they have a proportionally smaller change in demand when consumers' income changes (income inelastic demand). This is because consumers will continue to buy these necessity goods regardless of income & will put them in priority over more luxurious goods when income is low. When consumers' incomes increases their need for necessity goods such as food and clothing are already satisfied and they will spend the remaining portion of their income on more luxurious goods (such as personal trainers or gym memberships) which explains why they have a high YED (proportionally larger change in demand when consumer income changes)
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ReplyDeletePersonally I think companies like Apple should hold out from rolling out their next generation of products, as products like cellphones are normally quite expensive for the average person. Since many people have been laid off, the demand for cell phones right now would be quite low as most of their target market cannot afford to purchase a new device right now. And as for car companies, I think they should be producing more inferior cars than luxury cars right now. It seems to me that demand for cars is at an all time low right now, as people are rarely leaving the house during this crisis, and because of this I also think that they should be producing less cars overall, as it would be a waste of resources, as if they were to be producing the same amount of cars as they normally do, the percentage of them sold would be significantly less.
ReplyDeleteCanada’s government can use expansionary fiscal policy to attempt to raise aggregate demand (total spending on goods in a period of time at a given price level). By doing so, the government can encourage consumer spending, investments, and decrease the unemployment rate. This can be done by increasing government spending, cutting taxes, and increasing transfer payments. For example, the gov can reduce income taxes and provide better unemployment benefits so that people have a greater disposable income. The greater the disposable income, the greater aggregate demand meaning that people will spend more money. Also, increased government spending (ie. increased government healthcare spending) provides money to those on the receiving end of that spending, therefore increasing disposable income.
ReplyDeleteSince Canada is a developed country with a high income elasticity of demand, the fiscal policy will be effective. This is because the increased disposable income will result in a much larger increase in demand.
DeleteAs an investor and according solely to the income elasticity of demand model, it makes more sense to invest in developing countries in the near future. Since developing countries have a low income elasticity of demand, the large drop in incomes caused by COVID-19 causes a proportionally smaller decrease in demand, therefore there is more of a demand to supply compared to developed countries. However, this has been offset by the fiscal responses the Canadian and US governments have initiated, putting money into people's pockets so that the high income elasticity of demand in developed countries will cause a proportionally larger increase in demand with the hopes that it will somewhat offset the drop in demand caused by COVID-19. Developed countries have also used monetary policy (lowering interest rates, encouraging investment). Though monetary policy can be copied, fiscal policy like this cannot be repeated by developing countries due to lower budgets. Therefore, as of now, as a Canadian investor, I would not invest in either country given the unstable environment.
ReplyDeleteFiscal policy of giving people money directly would also have a smaller impact on quantity demanded in developing countries, as these countries have a lower income elasticity of demand.
DeleteOne of Canada's main exports is oil, which has been greatly impacted by this pandemic. The primary use for oil is for fuel in vehicles such as cars and planes, and with all the travel limitations being enforced around the world, transportation and therefore oil is declining in demand. This is reflected in the falling gas prices observable around the globe. Additionally, national incomes are also decreasing: people are losing their jobs or are unable to go into their workplaces due to fear of spreading the virus. Oil has temporarily shifted from once being a necessity of people who must commute to work to being more of an unnecessary expense for people staying homebound. Thus, its YED has likely increased, making its quantity demanded more responsive to a decrease in income. The combination of oil's already lowered demand and decreased income with an income elastic good will lead to a great decline in Canada's export revenue.
ReplyDeleteDuring the period of quarantine, we know that generally, wages have decreased due to many businesses having to close down or temporarily be on hold. As a result of lower income, the demand for inferior products will increase, whereas the demand for normal and luxury goods will decrease. This is because when income decreases, so does the amount of money consumers have to spend. Therefore, consumers would be leaning more towards inferior goods, as they are usually cheaper. Companies like Toyota who own and produce both luxury and inferior products, the ratio between the vehicles by their luxury brand to the inferior brand should be less than 1, meaning that more inferior cars should be produced than luxury cars. In general, since cars are relatively expensive items, the demand, however there would be an even greater decline in the demand for luxury cars. Therefore the actions should be taken to meet the change in demand.
ReplyDelete- Jennifer Gao
DeleteI think that companies like Apple and Toyota, that produce high end versions of the products they specialize in, should definitely hold out on releasing new products. Not only is it dangerous, but now is not an effective time to be promoting luxury goods when most people's attention are on basic necessities like food and hygenic products. In regards to the shortterm, it's wisest if they close most of their operations for the safety of their employees, but for the near future I believe that a shift in their production ratio would be a smart choice. Millions of people will come out of this pandemic without a job, so most of their consumers will definitely fall into a lower level of income. Other than that, I've seen companies change their advertising methods to promote these luxury products with more relaxed payment methods, as well as refocusing a lot of their efforts to helping the pandemic (ex. I think I heard that Apple is trying to create plastic face masks, and that other companies are creating other healthcare items).
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteCovid-19 will continue to increase the income gap in Canada, especially in the short term. The aphorism "The rich get richer and the poor get poorer" definitely applies to this scenario as it has in recent decades. The wealthiest of people more often have a high level of education and have professions that require high levels of skills. As high-salary professionals or managers, they are more likely to be able to accomodate for the new situations and be able to work from home. In the crisis of Covid-19, most of the higher earning Canadians will be able to continue maintaining a steady income and have access to necessities. On the other hand, those who have a lower income will suffer a large financial loss. Many of them have struggled with the loss of their jobs, specifically those who are employed in the service or delivery sectors that have many social interactions. As they are more likely to come into contact with the corona virus and they are unable to work from home, they are laid off. This causes the income gap in Canada to increase greatly. In the long term, when the industries are able to return, many people will begin to be employed again, which will help to decrease the income gap slightly, however, it will not be able to return to the way it was before.
ReplyDeleteWith the current decrease in natural income and the inevitable inflation that will ensue, companies like Apple and Toyota should not roll out more luxury products and should instead change their production ratio to producing more inferior products. This is because, as the income of consumers decreases, the proportion of income they have remaining after purchasing essential goods to spend on non-essential goods such as new Apple products or luxury Toyota vehicles decreases. This can be seen in the YED>1 nature of these products. These companies should instead “shift gears” towards production of inferior goods; as consumers’ income falls, their consumption behavior changes and drives an increase in demand for less costly inferior goods; as such, YED<0 for those inferior goods.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteCompanies such as Apple should be holding off their launches of new products or models during this time. If they choose to launch new products right now, they would be at a loss. Since Apple makes products that are not considered as essentials, the change in income will cause a proportionally greater change in change in quantity demanded. This means that if they release new products at this time, where everyone is receiving less income, there would be less demand and they would need to reconsider their selling plans. So it would be wise if Apple does not promote their new products since most people would not buy luxury goods at this time. In addition, companies such as Toyota should be producing more inferior products as compared to their luxurious options as more people are experiencing a loss in income. More individuals would be struggling to buy the more luxurious options that Toyota offers because they have less money to spend after their necessities and as a result, the demand for the more inferior options would increase as they look for cheaper substitutes. So it would be wise for Toyota to increase the quantity supplied for their more inferior options and decrease the quantity supplied of the more luxury options to accommodate the change in demand.
ReplyDeleteCompanies such as Apple should not begin to release new products while the world is under quarantine due to COVID-19. With nearly 1 million Canadians applying for employment insurance every week due to layoffs, the income of the average working Canadian will decrease as companies are forced to close down their business for the time being. That being said, workers will need to focus more on making sure that they and their families have access to basic necessities, such as toilet paper, and will not have the "breathing room" to go out and purchase luxury items like the products Apple produces. Because of this it can be predicted that if Apple were to come out with their new lineup of products, they would not sell very well, at least not until the end of quarantine.
ReplyDeleteWith companies like Toyota that offers both a luxury series of cars and an inferior series of cars, using the logic that the average Canadian has a decreased income at the moment, it would a good decision for Toyota to begin producing a higher amount of “inferior” cars and less luxury cars so that when people are able to return to their normal lives and begin to acquire income once again, they are able to sell more cars to the Canadians that may not be able to afford a luxury car after being temporarily without a job.
After the quarantine is over, people will return to their normal lives and life will begin to return to how it was before, with Canadians earning their income once again. I believe that 2 months after quarantine is over is a safe amount of time for companies to begin to roll out their new lineups of products, and to return to their previous luxury:inferior product production ratio.
Q: So what should companies do? Should companies such as Apple roll out their next generation of products? What adjustments should companies such as Toyota make in their product offering? Should they change the production ratio of the vehicles they produce high end (luxury type) versus their more inferior brand.
ReplyDeleteA: Products such as technology and vehicles are considered luxury goods, which have high YED values, especially newer generations or ones that are higher end. As national income decreases as a result of the Covid-19 pandemic, it we lead to a proportionally larger decrease in demand. This is because consumers are only willing to purchase higher priced goods once their income has increased. However, since national income has decreased, companies like Toyota should produce the inferior brands as the demand for luxury type brands would decrease even further. Thus, they should produce a higher ratio of low end vehicles to high end vehicles.
Under the impact of Covid-19, Companies such as Apple and Toyota should definitely refrain from releasing new luxury products such as new Apple products or Lexus cars under the Toyota brand. They should decrease the production ratio of luxury type to inferior brand, which means producing more products that are more affordable or decreasing quantity supplied for luxury type goods. This is because in times of Covid-19, most people have to stay at home instead of going to work; as a result, they loose their source of income. For luxury goods with high YED values such as the ones mentioned above, as income decreases in a population, there is a proportionally larger decrease in quantity demanded. With a lower income, people who used to demand luxury items will likely switch to more inferior goods.
ReplyDeleteSimilarly, Canada's export revenue will decrease under the impact of the pandemic. As income decreases globally, people will not spend as much money as before, the quantity demanded for goods with high YED values (which are often expensive goods with high tax revenue when ad valorem tax is added) will decrease drastically, and the government revenue earned from indirect taxes on these goods will decrease significantly. Consequently, there would not be enough money for governments from other countries to buy exported goods from Canada, thus the decrease in Canada's export revenue.
^Welna He
DeleteWith the income of Canadians decreasing, it would not be smart for companies such as Apple to release new products. This is because their products are not considered to be essential and in a time like this, people are more likely prioritizing the purchase of necessities, such as food. Luxury products such as Apple products have a high income elasticity of demand, meaning that a decrease in income would lead to a proportionally greater decrease in quantity demanded. Therefore, it would be smart for Apple to put their releasing plans on hold. In addition, companies such as Toyota, which also produces luxury goods, should produce more inferior products in comparison to luxury products, as the demand for inferior goods will increase when the income of consumers decrease, shown by their YED being less than 0. Furthermore, the demand for the luxury goods of Toyota will decrease, similarly to that of Apple’s. This is because when one’s income decreases, they are now no longer prioritizing the purchase of luxury goods but rather cheaper, inferior goods. Therefore, companies should not release luxury goods but rather produce and sell more inferior goods.
ReplyDeleteDue to the global epidemic, companies such as Apple and Toyota should not roll out their next generation of products and should instead produce more of their inferior or income inelastic products. Luxurious products such as a new iphone or a new car are usually very income elastic; they tend to have a YED > 1. This means that their percent change in quantity demanded will be higher in response to the percent change in income. Right now in Canada, many businesses are closing, many people are losing their jobs, and general income is decreasing. If companies keep on producing luxury goods, the quantity demanded for the products will decrease more as income decreases. Instead, companies should switch to producing more inferior goods or income inelastic goods if possible. For example, Apple should change to producing more older models of their iphones because people who need to buy a new phone right now are going to opt for a cheaper one due to a decrease in income.
ReplyDeleteApple, a company that sells electronics such as smartphones, should not roll out their next generation of products during this pandemic. This is because the products that Apple produces are considered luxury goods and are not essential for living. In this time, when income is at a low for many people due to the pandemic, there will be very little demand for Apple products. As luxury goods, these products are income elastic, so a decrease in income will lead to a greater decrease in the demand of a good. Apple should wait to release their new line of products once the pandemic has been resolved and the economy improves. The same principle is shared for Toyota, which also produces luxury goods in the form of cars. In this time when people do not have much income, this will lead to an even greater decrease in the demand of Toyota cars, as less people will be inclined to buy units of products and will instead prioritize their income on essential goods. Toyota should instead focus on producing and selling more of their inferior products. This is because these inferior products will see an increase in demand when the income of consumers decreases.
ReplyDeleteFor Apple, I think they should hold out on producing and promoting their next generation of products. Their electronics are mainly considered luxury goods. Luxury goods are income elastic, which means that there is a proportionately greater change in the quantity demanded in response to a change in income. When there is an decrease in a consumer’s income level, the demand for a good decreases significantly as the consumer has a lower income which will be allocated so basic necessities will be prioritized and purchased first, and other non-essential luxury goods will be consumed in smaller amounts. With our current COVID-19 issue, many consumer’s are losing their jobs or receiving lower incomes due to certain limitations of how much work they can complete. Since Apple products are luxury goods and income elastic, the quantity demanded of these goods will decrease significantly as income of the consumers decrease. Toyota also produces vehicles which are luxury goods. The quantity demanded for these high end vehicles will also be affected by the change in the consumers’ incomes. As their incomes decrease, most consumer’s will be using their income to purchase necessities and there will be a large decrease in quantity demanded of these luxury goods. For both Apple and Toyota, it would be a good idea to change to producing more inferior products. (goods that are more affordable but may be less in terms of quality). Demand for inferior products increase when consumers have less money to spend (less income). Since inferior goods are cheaper, consumers with a lower income will find purchase these goods because they are more affordable, and they are not willing to purchase more costly substitutes (even if they are of better quality).
ReplyDeleteSo what should companies do? Should companies such as Apple roll out their next generation of products? What adjustments should companies such as Toyota make in their product offering? Should they change the production ratio of the vehicles they produce high end (luxury type) versus their more inferior brand.
ReplyDeleteCompanies such as Apple shouldn’t roll out their next generation of products during this time of recession. The products that Apple releases for the public to purchase are usually very expensive meaning that they are a type of luxury good (normal good). Normal goods have a YED value of over 0, meaning that demand for it increases as consumer income increases. However this also means that demand for normal goods decreases as income decreases. Due to Apple products being a type of luxury good, it has income elastic demand (YED > 1) which means a change in consumer income leads to a proportionately greater change in the quantity of it being demanded. Therefore in this time of recession, when consumer income has been decreasing & is low, means demand for Apple products will decrease significantly. If they roll out their next generation of products right now, they should expect their sales to be low.
Similarly high end luxury type cars also have high YED, so change in demand for these luxury cars will have a proportionally larger change when consumer income changes. During this recession, people’s significant decrease in income will cause a large decrease in the quantity demanded of Toyota’s high end type offerings. On the other hand, cheaper inferior type cars are inferior goods (YED < 0), as people will prefer the cheaper option when income is constricted, therefore when consumer income is decreasing, the demand for this inferior good will increase. Due to this, Toyota should adjust their product offering to more income inelastic products, which are the cheaper, more inferior type products. They should change their production ratio of vehicles to producing more inferior brand types and reducing the amount of high end luxury types
During this difficult time it is evident that economies around the world are suffering. People around the world are in a shutdown production of goods and services as well as consumption have halted. Other than necessities such as food, water, and medical services companies are suffering and the time period of the affects of the corona virus could be long lasting. Governments around the world are trying to aid citizens by planning large amounts of money to aid their country. They are handing out payments to citizens, small businesses, and delaying tax payments. As for the country of Canada, they have established an Economic Response Plan of $82 billion to support workers and businesses.
ReplyDeleteIn terms of small and large businesses, they should be lowering their cost since the demand of goods and services have plummeted greatly from the global shut down. However, companies with the ability to continue and possible change their courses of production to goods that are higher in demand during this time should make the effort. For example, Tesla has planned to look into building ventilators for patients out of car parts. Personally, my parents own a clothing company and the result of malls and stores closing due to the corona virus has definitely affected them. However, they have looked into using their factories to manufacture medical gowns which are high in demand. I believe that companies with the ability to change their factors of production to target goods high in demand will help to eliminate shortages and bring the market to a balance.
-Sophia Wang
In a situation such as quarantine and social isolation, many companies have either temporarily or permanently laid off employees, because when no one leaves their home, no one is going to come buy products. As a result, many people have at least temporarily lost their jobs, resulting in a drastic decrease in income. That being the case, I do not think that companies like Apple or Toyota should be rolling out new luxury products. Luxury products like the latest and greatest phone, or high end cars, are highly income elastic, and with the decrease in income there would be a proportionately greater decrease in the quantity demanded. If more luxury products were to be produced in large quantities, it is hard to imagine that companies would break even, let alone turn a profit.
ReplyDeleteThe next year and a half will hopefully be a slow recovery from this pandemic.
ReplyDeleteIn a time like this, companies such as Apple should not continue developing their next generation products because many people will not be able to afford it or need it at this time. This is because many jobs have been laid off as a result of this pandemic, so they have to rely on the government to help (a decrease in national income). With a decrease in income, people will shift to buy mainly normal and necessity goods, so products like high-end Apple phones will not be a top priority.
Furthermore, the demand for inferior goods would increase in a time of decreasing income as a result of its negative relationship. Therefore, it would make the most sense for companies such as Toyota to change their production ratio of high-end and the cheaper brand to produce more of the cheaper brand. This way, they will still be able to sell a similar amount of units and not waste much resources that would otherwise go into producing the high end models.
Canada’s export revenue will definitely decrease mainly because of the closing of borders in many countries. Another factor that will impact Canada’s export revenue is the decrease in demand for normal and luxury goods. This would have contributed a lot to Canada’s export revenue before the pandemic, but now with a decrease in incomes worldwide, the overall export revenue will also decrease.
Covid-19 will have a large impact on the income gap in Canada in the short term. It is already known that national income has decreased as a result of the pandemic, however many people that used to work in the service industry and made little to begin with will suffer even more. The people who made the most income will suffer a lot as a result of their employees not being able to work to their full capacity. However, I think their income will have a relatively smaller decrease than the many people in the service industry. For this reason, the income gap would increase in the short term.
For most, the COVID-19 pandemic appears to be having the same impact on lifestyles. Many employees are being instructed to begin working from home to minimize interpersonal contact. Some employees are labelled as "essential workers", and instead work reduced hours and altered shifts to reduce exposure to colleagues and slow down the spread of the virus. That isn't to say, however, that the financial status of citizen's homes aren't having a large impact on Canadian lives. As one climbs up the financial pyramid, there exist more and more wealthy people with large sums of money stashed across various investments. Most members of this demographic, aside from already having years of savings that neglect any worries they may come across, are able to passively generate income without the need to travel anywhere for work. As long as the interest from their capital doesn't drop to 0% (which it hasn't), those belonging to this financial class can relax in a time of suffering like this, with some continuing to watch their equity grow. For those on the opposite end of the spectrum, life during COVID-19 gets harder. Many lower paying jobs (such as labour or cashier work) often don't logistically allow employees to work from home, so they're either forced to risk their health going outdoors every day or simply laid off from work altogether. Likely with little cash saved up, members of the lower class will begin to see more of a financial crisis building up their lives, not knowing how to earn enough money to make a living now that their paychecks have been torn away from them. In the long term, the wealth gap expanded by the pandemic will only worsen; since our current quarantine is economically unsustainable, more people will begin to see the loss of their jobs. While the working class descends into an abyss of financial dejection, the capitalist class will continue to enjoy an unaltered lifestyle where their money works in their place.
ReplyDeleteDue to this global pandemic, many businesses have shut down due to both health and financial reasons. Despite Canada’s financial aid with the CERB, the majority of Canadians have found themselves with a decrease in income due to unemployment. Not only this, but export revenue has also decreased. One of Canada’s main exports is dairy; the issue arises from the fact that countries with a high price elasticity of demand. This means that they are largely impacted with the decrease in income. Due to the decrease in spending money and consumption, it results in a decrease in imports from these foreign countries, decreasing Canada’s export revenue. To boost Canada’s economy, the government can stimulate AD through expansionary fiscal policy. By decreasing taxes, it allows Canadians to have more spending money, allowing for an increase in consumption as well as investments. In terms of foreign direct investments, currently, it may be better to invest in a developing country. This is due to their low-income elasticity of demand when compared to the high elasticity of demand for developed countries. This suggests that while income has decreased globally due to the recent pandemic, there is less impact in developing countries due to their lower-income elasticity of demand.
ReplyDeleteIn response to Apple’s plans to release new products, it may be better for them to hold off for a while. This is because a large majority of their consumers are from countries with a higher income elasticity of demand. This means that recent events would have impacted their income drastically, leaving them with a decrease in spending money. Due to this, the majority of consumer consumption will go towards necessity goods rather than technological goods that Apple offers. For Toyota, it would be in their interest to produce more inferior cars. This is because, with the decrease in income, consumers are now more likely to consume inferior goods rather than luxury goods.
-agnes ho
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ReplyDeleteThe COVID-19 is certain to bring a recession to the whole world. Most people’s income would certainly decrease, and GDP per capita would significantly drop in the first quarter. With that knowledge, companies should expect a drop in their demand, thus adjusting their supplies accordingly. Moreover, they should hold back on offering luxury goods. For instance, the newest Apple phones typically have higher YED due to their high prices. In the backdrop of a recession, Apple should hold back on rolling out their next generation of products, as people would consume a lot less due to the lessened income. Similarly, Toyota should significantly decrease their supply of luxury cars, while also lowering the supply of inferior brands to match their demand during the pandemic.
ReplyDeleteWith the main exported products being petroleum, cars and aircrafts, and the main trade partner being the US and the EU (both being severely impacted by the pandemic), Canada’s export revenue would surely fall. I agree with Hayes’ opinion, that petroleum has once shifted from a necessity goods to an unnecessary expense, due to the travelling limitation and the decrease in industrial productions. That said, Canada’s current account balance is unlikely to change. Just like how the US would purchase less petroleum, Canada would also reduce their consumption in machinery and electric equipment, as there is less demand during the pandemic.
Due to the pandemic, many Canadians have lost their source of income and have been laid off. Due to declining national income levels, consumers have had to switch from demanding normal goods to demanding more inferior goods. Thus, it would be in the best interest of companies such as Toyota to produce greater proportions of inferior goods compared to luxury goods, so that people would be encouraged to consume and so that profit could be maximized. Apple should also hold off on releasing new products, as consumers are currently inclined to spend more towards necessity goods, rather than technological goods. This is because a good portion of their consumers are from countries or income levels with a high income elasticity of demand for their products; in other words, Apple products are commonly perceived to be luxury goods.
ReplyDeleteAlthough consumption of necessity goods will see a relatively small decrease in demand, the demand for luxury goods will fall drastically, due to their higher income elasticity. Examples of these include manufactured goods and services, meaning the decrease in income levels would cause a greater-than-proportional change in their demand. This would affect both domestic and foreign consumers, as income levels have been falling across multiple economies. Demand for Canadian exports in these sectors would fall, decreasing the export revenue, worsening the current account, and reducing the government’s ability to pay back debts. While devaluing the exchange rate could help, it would only improve the balance of trade for goods and services with price-elastic demand. Opportunities for foreign direct investment should be sought in less developed countries, as these countries tend to have lower costs of production. Canadian firms would experience greater profitability, which can be used to improve disposable income levels and stimulate aggregate demand.
Finally, COVID-19 has the potential to increase the Canadian income gap. Workers who have been laid off are more likely to have been low-seniority, and therefore, earning lower incomes, showing how this virus disproportionately affects the less wealthy. As well, those who cannot afford private health insurance will need to pay substantially more if they become infected and require prescription drugs. If left unchecked, this can cause the poverty cycle to feed itself and result in a widening income gap in the medium or long-term.
- Bernie Yan
COVID-19 negatively affected many Canadians having been laid off. Consumers have changed their spending patterns from normal to inferior goods. In order to sustain themselves, companies like Toyota should aim to create more inferior goods so that consumption can continue as well as earning more profit. Technological companies such as Apple should take a beat on innovative products, because demand is centered around necessity goods, rather than technology which is considered luxury goods. Due to their higher income elasticity, the demand for luxury goods will decrease. Decreased income levels would cause a significant decrease in their demand. This affects the domestic and foreign market, as income levels have been falling across multiple economies.Canadian exports are seen as less desirable in manufacturing sectors decreasing the export revenue, which would weaken the current account, and makes it more difficult for the government to pay back their debts. Focusing on foreign direct investment in LDCs would be most desirable, as these countries tend to have lower costs of production. Canadian firms would gain greater profits and recover the aggregate demand in the long run. It’s no secret that this pandemic will increase the income gap. Most workers that are being laid off are of lower level jobs which makes it more difficult for them to recover in this economically challenging time as insurance will increase substantially if infected and require medication. As of now, we can expect an ever increasing income gap for an approximate 5 years before there is a recovery seen in the business cycle.
ReplyDelete- Sairamya
Apple’s recent unveiling of their new iPhone SE suggests that they will still be moving forward with rolling out their next generation of products. However, this new iPhone is significantly cheaper than its other Apple counterparts, at a price of USD 399 compared with its next cheapest product at USD 699. As such, it looks like Apple is adapting its product offering.
ReplyDeleteAs mentioned by other posts, the demand for necessity goods will not change dramatically due to its income inelasticity whereas the demand for luxury goods such as Apple’s higher-end phones is going to decrease drastically due to its income elasticity. Particularly since Apple products fare much better in areas of the world with higher income elasticities, it may be in Apple’s interest to hold off on releasing new items.
However, since Apple has already announced such a release, it may be worth trying to figure out why they would do so. Their new product, although still a non-necessity good, is significantly cheaper to their other products and now can compete in the market for cheaper phones. This may be a bid to start competing earlier than other businesses who may have chosen to hold off on new releases, giving Apple a better chance of securing a foothold in this new market.
For Canadian businesses, foreign direct investments into developing countries where income elasticity is lower and their products have lower YEDs would be beneficial to Canadian businesses who pay less due to lower production costs. From a development perspective, it may be helpful in increasing the national income of a nation, employing more individuals and hopefully improving the skills and knowledge of local workers. If more Canadian businesses were to do this, it may help LDCs to break free from the poverty trap more easily by increasing levels of productivity and income.
The income gap in Canada will most definitely increase in the short term, as there is a disproportionate effect on those of lower incomes as they are more likely to work part-time jobs and/or seasonal employment. Although measures such as the Canadian Emergency Response Benefit (CERB) have been created by the government to mitigate the economic effect on individuals, it is likely that in the short to medium term we will see an increasing income gap as these individuals are thrust back into the poverty trap due to a lack of employment among other challenges.
The COVID-19 pandemic has negatively affected humans all over the globe. With the self-isolation protocols being implemented, we will surely experience depression-era-like levels of national income.
ReplyDelete- Alan Mak
The wealth of many people has been negatively impacted. This loss in spending power will likely be followed by a fall in aggregate demand, as consumption decreases, and the demand for goods and services will shift from luxury goods to inferior goods. In response, companies will likely begin to have lower cost product offerings, as was seen with Apple’s launch of the iPhone SE earlier this week.
Countries such as Canada have a number of options, including fiscal and monetary policy. Concerning fiscal policy, there has been government spending in the forms of employment insurance payouts and the Canadian Emergency Response Benefit (CERB). This is necessary for many, as a survey conducted in 2019 by MNP Ltd. found that “31 per cent of Canadians say they don’t make enough money to cover their bills and debt payments” and that 46% of Canadians are "$200 or less away from financial insolvency at month-end” (“46% of Canadians $200…,” 2019).
Regarding monetary policy, on March 27, the Bank of Canada cut the target interest rate from 0.75% to 0.25% in hopes of stimulating the Canadian economy. The cost of borrowing has been lowered, and increased economic activity should ensue. The US Federal Reserve went as far as lowering the federal funds rate from 0.25% to 0% so that “maximum employment and price stability goals” could be met (“Fed will keep rates…,” 2020).
As national and foreign incomes are falling due to COVID-19, Canadian export revenues will fall. Canada’s two largest export categories are mineral products (eg. crude petroleum, petroleum gas) and vehicles (eg. cars and aircraft), neither of which are doing particularly well at the moment. This fall in export revenue will weaken the current account, and it will be more difficult for the government to return their debts.
For Canadian businesses, they should look for opportunities for foreign direct investments in developing countries where there are relatively low costs of production. Also, income elasticity is lower and their products tend to have lower YEDs, which would be beneficial to Canadian businesses who pay less due to lower production costs. Foreign direct investments may also prove to be helpful in development economics. There will be an increase in the national income of a nation, increased employment opportunities of individuals and an improvement in the skills and knowledge of local workers. This may allow LDCs to escape the poverty trap more effectively by increasing levels of productivity and income.
The devastating consequences of COVID-19 have affected millions of people across the world. As the blog details, a recession is bound to occur and the economy must be ready to take a hit. National income and GDP per capita will both noticeably decrease. To resist the consequences, companies should decrease their supplies to match the falling demand. Apple should not look to roll out new products since their goods are not necessity goods. However, their recent release of the iPhone SE is valued at a much more inferior price than their usual products. Companies like Toyota should decrease the supply of luxury vehicles and shift their product offerings to more inferior goods.
ReplyDeleteCanada’s export revenue will definitely decrease as the global economy struggles. Many countries face recessions, and other countries will not look to purchase more Canadian goods. For Canadian businessmen, they should look for opportunities in less developed countries as there exists lower costs of production. Unfortunately, the income gap in Canada will increase in the short term. However in the long run, the income gap will likely be able to recover.
Hi Mr. Stewart!
ReplyDeleteThe idea of income elasticity of demand (YED) is especially pertinent in these uncertain times, which represents the responsiveness in demand of a good/service given a change in income. The sudden arrival of this pandemic is resulting in mass unemployment and a decrease in national income, affecting the demand of various goods and services substantially, but differently, depending on the nature of the good.
YED is calculated by % change in quantity demanded divided by % change in income, and is specific to the good/service being analyzed. For instance, luxury goods such as the latest iPhone are relatively income elastic, meaning that a change in income will result in a proportionally greater change in demand. That being said, companies such as Apple and Toyota should avoid putting out new luxury products because the high, positive income elasticity of the products makes it so the proportional drop in income has a much greater effect of the decrease in quantity demanded, significantly greater decrease in quantity demanded compared to necessity goods. Inferior goods on the other hand, for instance canned foods, ramen and more, increase in quantity demanded as income decreases, due to having a negative YED.
They should look for opportunities to manufacture necessity goods or income inelastic goods, or inferior goods. This is a trend that can be seen in many companies that focus on luxury goods such as Canada Goose, Louis Vuitton or Shiseido that make medical supplies such as scrubs, face masks and hand sanitizer respectively. Especially since they create manufactured goods, it is far easier to change their production towards other goods, reflected in its elastic supply. Apple has announced that it plans to release a cheaper alternative to it’s traditional iPhone like in the iPhone SE that is 399 USD, significantly cheaper than its other offerings. This indicates that Apple has decided to adapt to the current economic situation.
The next 12-18 months will be highly uncertain, however one thing that is certain is the increase in the Income Gap. This is because individuals of lower income will be disproportionately unemployed in general as workers in part-time jobs, non-essential service sector are laid off due to social distancing protocols. Moreover, wealthier individuals, with specialized jobs, such as doctors or healthcare workers are in high demand, while IT personnel, teachers and other STEM workers can work from home. Although there are currently benefits in place e.g. CERB (Canadian Emergency Response Benefit), to mitigate the effect of the income gap, there is likely an increase in the income gap due to the disproportionate low-income workers being unemployed and subject to the poverty cycle.
Canadian Businesses may see opportunities for foreign Direct Investment (FDI) in less developed countries (LDC) where the costs of production (e.g. labour) are lower to increase aggregate demand in the long run due to higher profitability.
Anna Wang
Income elasticity of demand, or YED, measures the responsiveness in the quantity demanded of a good in response to a change in consumers’ income, measured by the percentage change in the quantity demanded over the percentage change in income. The COVID-19 pandemic has generated massive economic consequences for Canada, causing a wave of job layoffs and shutting down of non-essential businesses. With a decrease in purchasing power, households would spend a greater proportion of their income on inferior goods, as they are more income inelastic -- the demand for such goods is less responsive to changes in income, as they are deemed to be necessities in order to maintain a decent standard of living.
ReplyDeleteSince the majority of Apple’s products can be counted as luxury goods (income elastic), a decrease in income levels will result in a proportionately larger decrease in the quantity demanded for Apple products, where YED > 1. Similarly, it would be in Toyota’s best interest to promote and shift production focus away from their luxury brands, such as Lexus, and allocate their resources to increase their supply of more inexpensive models, such as Prius and the RAV4, where YED < 0. Maintaining adaptability in production would be essential in order to prevent businesses from taking large profit hits.
With other countries entering recessions, nations will be focused on stimulating domestic growth and recovery, in an attempt to revive and support local industries and manufacturers and to recover lost income for households. As such, Canada’s export revenue may take a hit in the short-term, as countries will be more likely to enact protectionist measures. In these times, Canadian businessmen may choose to seek out opportunities in Less Developed Countries for foreign direct investments, as the cost of production, such as human capital, is significantly lower, meaning lower production costs for businesses in order to remain profitable.
Inevitably, these mass shutdowns are feeding into the widening income gap between Canadians within the next 12 to 18 months, which can be especially detrimental to minimum-wage workers who no longer have a steady source of income. Thus, in the short term, the income gap in Canada will continue to grow as businesses start to shut down permanently and the circulation of money comes to a halt. However, in order to see an improvement in the medium-term, the government will need to consider a combination of expansionary fiscal and monetary policy, which will pave the way for long-term improvement in the income gap.
- Karmenjot Minhas
During periods of economic recession, as what will likely be encountered during these next twelve to eighteen months, sales for luxury goods and services such as Tesla cars and Apple products will suffer drastically. These products have a high income elasticity of demand (YED > 1), as each marginal decrease in income will lead to a proportionally greater decrease in the quantity demanded. As a result, it may be better for Apple to refrain from rolling out their next generation of products right now. Even so, Apple’s recent release of their new iPhone SE indicates a significant shift in the affordability of their products. Unlike the iPhone 11, which retails for USD 699, the iPhone SE can be purchased for USD 399. This shift in pricing is likely a smart move on Apple’s behalf, as the quantity demanded for income inelastic goods (0 < YED < 1) and services is less vulnerable to changes in income. Thus, while Apple’s recent release is still considered to be a non-necessity good, the inferior model is more likely to succeed than its luxury counterpart. Similarly, Toyota should change the production ratio of the vehicles that they produce so that more inferior brands are produced over high end (luxury type) brands in order to adapt to the current economic situation.
ReplyDeleteFrom the perspective of Canadian businessmen, foreign direct investment opportunities exist in less developed countries. These countries tend to rely on primary goods for their national income. As necessity goods, these goods are inelastic and are less affected by the instability of income in these uncertain times. Furthermore, the costs of production, such as labour, are significantly cheaper. Thus, this might be a worthwhile investment during the pandemic.
In an attempt to minimize the growing income gap, the Canadian government has implemented demand-side interventionist policies, including the Canadian Emergency Response Benefit (CERB). In theory, the act of providing transfer payments to those who have lost their jobs due to COVID-19 should minimize the decrease in national income during this pandemic by increasing the disposable incomes by which households have to fund their spending on necessity goods such as groceries. This should thus mitigate the subsequent shift of the AD curve to the left.
One of Canada’s main exports is oil — this primary resource has been significantly impacted by the pandemic. Since national and foreign incomes are falling due to COVID-19, Canadian export revenues will fall. This fall in export revenue will weaken the current account, which can have long term effects on Canada’s debt.
— Bonnie Lu
[Nicholas Hamzea]
ReplyDeleteThe income elasticity of demand (YED) refers to a change in the quantity demanded of a good or service in response to a change in the income of the consumer. If a good or service is income elastic, the quantity demanded of the good will be more affected by a change in consumer income. This applies to luxury goods as their quantity demanded increases at a proportionally greater rate when consumer income increases. On the other hand, the quantity demanded of income inelastic goods will change proportionally less relative to a change in consumer income. These are most likely necessary goods as consumers need them regardless of their income. Additionally, a distinction can be made between normal and inferior goods in the sense that normal goods have a positive YED while inferior goods will have a negative YED. This is because as consumer income increases, they will favour normal goods over inferior goods, thus leading to an increase in the quantity demanded of normal goods and a decrease in the quantity demanded of inferior goods when income increases.
As a result of this pandemic, many economies are facing high unemployment rates and lower levels of income. There is also a decrease in the real wealth of consumers as despite experiencing lower levels of income and potential unemployment, the APL has remained approximately the same, meaning that a greater portion of their income must now be spent on necessity goods. Because of this situation, the quantity demanded for many luxury goods has decreased substantially as they are income elastic and consumers can no longer afford them. On the other hand, the quantity demanded for necessity goods such as food and water remains relatively unchanged as they are income inelastic and consumers must purchase these items regardless.
With consumer income being lower, companies should focus more on low-end, inexpensive products and hold out on releasing or producing their more expensive products as consumers have low disposable income and cannot afford more expensive products. For example, companies such as Toyota should be focusing on inferior models as many consumers will not have the necessary level of income to purchase a more expensive car.
This pandemic has different implications for different producers, depending on the YED of the good or service that they produce. Right now, the service sector is being hit the hardest as services have the most elastic YED. This is because many of the services provided, such as restaurants and hotels, are not considered to be necessities, meaning that the quantity demanded for them will drop significantly as consumer income decreases. On the other hand, primary product producers are the least affected as primary products typically have an inelastic YED. This is because many primary products, such as food, water, and cotton, are still desperately needed even in a time such as this. As a result, consumers will continue purchasing these goods even if they experience a decrease in income, resulting in a smaller change in the quantity demanded. Lastly, manufactured goods also have a relatively elastic YED as most manufactured goods are not considered to be necessities.
Canadian businessmen should be looking for FDI opportunities in less developed countries, as the costs of the factors of production such as labour are lower. This will allow them to produce their goods at a lower overall cost which will increase profit and benefit them in the long run.
Overall, this pandemic will increase the income gap. In the short term, those with lower incomes are the most likely to be laid off or to experience a wage cut, thus reducing or even eliminating their income while the richest individuals such as business owners will still maintain a high level of wealth. Moreover, with interest rates and stock values low, this is an excellent time to invest in stocks which will gain value once the economy recovers. However, this can only be done by those who are wealthier as they will have the disposable income necessary to invest.
In the times of recession when the consumer income has decreased, companies should appeal to the change by producing inferior models instead of luxury models. As many others have mentioned, companies such as Apple and Toyota should hold back on rolling out new products. They should change their production from luxury models to inferior models, like in the case of Apple with the new iPhone SE, to maintain their oligopolistic position in their respective markets.
ReplyDeleteCanada’s export revenues will decrease due to falling incomes in other countries that import goods from Canada. For countries that normally export a lot of non-essential goods, they should switch to more essential goods, which further places importance on a country's ability to specialize in more than one kind of good or service. In the example of China, their economy is almost fully recovered and is now exporting goods such as masks and goggles which have become a necessity in the current situation.
Due to the decreased demand for services, these workers, often already working minimum wage, are now unemployed. Therefore, Canada’s income gap will widen because the lower income groups are affected more than the higher income groups. However, in the medium and long term, there should be improvement in the income gap as businesses reopen.
Cindy Zhang and Michelle Qian
DeleteCOVID-19 has lead to significant damage to the global economy. Due to the high number of businesses being forced to shut down due to government regulation, GDP per capita has fallen and discretionary income has plummeted.
ReplyDeleteThis drop in consumer spending power leads to a decrease in consumer expenditure, and thus, a shift in aggregate demand to the left, ceteris paribus. In addition, firms will respond to the change in consumer behaviour by decreasing investment in capital, which also causes a shift left in AD, ceteris paribus. Government spending will likely increase due to more workers requesting money from employment insurance; however, overall, a recession is likely to occur. As of right now, COVID-19 is still spreading across Canada while the situation in China, one of our main trading partners, is improving. This is expected to dead to a decrease in net exports since Canadian industries have halted manufacturing while China’s industries are starting to reopen.
The government of Canada can implement different fiscal and monetary policies. Fiscal policy is effective because it serves the function of an automatic stabilizer. Employment insurance payouts naturally increase during times of high unemployment, helping to stimulate the economy. The government of Canada can increase the amount of transfer payments given out in hopes that the multiplier effect will hep the money injected into the economy to create widespread economic benefits.In terms of monetary policy, the Bank of Canada can cut interest rates to encourage business investment and to discourage saving. In fact, on March 27 2020, the Bank of Canada cut the interest rate from 0.75% to 0.25%. This lowered cost of borrowing is expected to boost economic activity in Canada.
Income elasticity of demand is defined as the percent change in quantity demanded as a result of percent change in real income. Our Canadian businesses should look for opportunities for foreign direct investments in developing countries where there are relatively low costs of production. In developing nations, income elasticity (YED) is lower and their products tend to have lower YEDs, which would be beneficial to Canadian businesses. Products of the primary sector (which are more prevalent in LDCs) tend to have low YED values, while products of the secondary/tertiary sectors tend to have high YED values. Since demand for most goods/services from LDCs will not have as significant of a drop as demand for luxury manufactured goods, foreign investment in LDCs is a good way to create economic growth around the globe.
Jennifer Chen
COVID-19 has lead to significant damage to the global economy. Due to the high number of businesses being forced to shut down due to government regulation, GDP per capita has fallen and discretionary income has plummeted.
ReplyDeleteThis drop in consumer spending power leads to a decrease in consumer expenditure, and thus, a shift in aggregate demand to the left, ceteris paribus. In addition, firms will respond to the change in consumer behaviour by decreasing investment in capital, which also causes a shift left in AD, ceteris paribus. Government spending will likely increase due to more workers requesting money from employment insurance; however, overall, a recession is likely to occur. As of right now, COVID-19 is still spreading across Canada while the situation in China, one of our main trading partners, is improving. This is expected to dead to a decrease in net exports since Canadian industries have halted manufacturing while China’s industries are starting to reopen.
The government of Canada can implement different fiscal and monetary policies. Fiscal policy is effective because it serves the function of an automatic stabilizer. Employment insurance payouts naturally increase during times of high unemployment, helping to stimulate the economy. The government of Canada can increase the amount of transfer payments given out in hopes that the multiplier effect will hep the money injected into the economy to create widespread economic benefits.In terms of monetary policy, the Bank of Canada can cut interest rates to encourage business investment and to discourage saving. In fact, on March 27 2020, the Bank of Canada cut the interest rate from 0.75% to 0.25%. This lowered cost of borrowing is expected to boost economic activity in Canada.
Income elasticity of demand is defined as the percent change in quantity demanded as a result of percent change in real income. Our Canadian businesses should look for opportunities for foreign direct investments in developing countries where there are relatively low costs of production. In developing nations, income elasticity (YED) is lower and their products tend to have lower YEDs, which would be beneficial to Canadian businesses. Products of the primary sector (which are more prevalent in LDCs) tend to have low YED values, while products of the secondary/tertiary sectors tend to have high YED values. Since demand for most goods/services from LDCs will not have as significant of a drop as demand for luxury manufactured goods, foreign investment in LDCs is a good way to create economic growth around the globe.
Jennifer Chen
Wilson Liu:
ReplyDeleteGiven that consumers’ incomes have decreased, companies producing inferior goods (negative YED) should increase the quantity they supply to the market to meet the increased demand and enjoy greater revenue. On the other hand, companies producing normal and luxury goods (positive YED) should decrease the quantity they produce and supply to the market to meet the decreased demand and avoid ending up with a surplus of stock.
Companies such as Apple should delay rolling out their next generation of products until after the pandemic has been resolved and the economy bounces back. There would not be a high demand for their products right now, given that they are luxury goods, so their jump in revenue would likely decrease in comparison with their releases of products in the past. At the moment, consumers with a need to purchase technology would be turning to the inferior goods produced by cheaper brands like Huawei or Android as substitutes. However, if they delay their release until the economy is bouncing back and consumers’ income is rising again (leading to an increase in demand for luxury goods), they would enjoy greater revenue – perhaps even being able to prey on impulsive purchases made by consumers in the aftermath of this depressing pandemic.
Similarly, companies such as Toyota should change their production ratio to produce more inferior brands rather than high-end luxury vehicles to adjust to the changes in demand for each type of good mentioned above.
As national incomes fall in the economic devastation of this pandemic, Canada’s export revenue will also fall. Notably, one of its largest exports - crude oil and petroleum products - has already been severely affected by this pandemic.
The Canadian businessman should look for foreign direct investment opportunities in less developed countries, as the costs of production (especially that of labour) are lower than those in developed countries. By lowering their costs of production, businesses will be better equipped to handle the loss in revenue brought about by this recession.
This pandemic will widen the income gap in Canada, with unskilled low-income workers disproportionately being affected by the mass layoffs. Low-income workers who live paycheck to paycheck will be devastated by this loss of income, which may result in them not being able to pay their immediate expenses (rent/bills). They might even take on debt in order to do so, further trapping themselves in the poverty cycle. Higher-income skilled workers are more likely to continue their jobs working from home, as well as have a cushion of savings to fall back on.
The pandemic COVID-19 has brought upon an economic downturn in global economics and some have referred to this crisis as the 3rd World War. The world will likely see periods of recession, or even a depression, over the upcoming economic quarters, depending on when COVID-19 becomes controlled.
ReplyDeleteAs the income elasticity of demand for the necessary goods such as food products and toilet paper are low, these firms are currently experiencing shortages as the Canadian population rushes to stock the nonperishable and essential goods amid the uncertainty of the global crisis. However, after the initial panic period, the demand for the majority of these goods will likely return to slightly below normal due to their inelasticity.
On the other hand, the unpredictability of the spread of the virus and length of the lockdown, as well as how sudden the situation has come to be, decreased both consumer and business confidence. The enforcements of the national lockdown caused unemployment rates to skyrocket. As there are many Canadians that do not have paid sick leave and households have a low average savings rate of 1.9% household income as of 2019, this creates more panic and decreases the propensity to consume. Thus, for the luxury goods and the products and services that are no longer necessities, they become income elastic.
Goods and services pertaining to transportation, such as car dealerships and manufacturers and gasoline, would face low demands in the quarantine period. This is also applicable to tech companies like Apple who would also face production and supply problems. China is the biggest link in the global supply chain. However, their government is mandating factory shutdowns which cause necessary components to not be delivered/traded. Therefore, instead of rolling out their next generation of products, these companies should redirect their resources to aid the healthcare sector and innovate ideas that solve certain equipment shortages. At the same time, they could lower the cost of their current products or produce more inferior brands to increase their revenue and accommodate consumers who may urgently need the goods or services but are unable to afford them due to their lack of income and savings.
Hi Mr. Stewart,
ReplyDeleteHope all is well and that you're safe and sound!
In keeping up with the economic situation the world is currently facing due to COVID-19, with stocks responding unconventionally to record levels of unemployment, and $USO futures clocking in at negative rates, it's definitely confusing as to what will happen next.
Canada and other countries are currently expanding their unemployment benefits, and Universal Basic Incomes, etc., but these are just temporary stopgaps until a cure for the virus can be found. In my opinion, a recession was already timed in to occur (especially with bursting tech valuations, record stock growth, etc.), just that the virus has taken precedence over this and created commotion.
To answer your questions briefly:
1. Apple rolled out a low-cost phone this month which is unique. Potentially enticing individuals to spend their EI benefits and playing the high quantity, low price game. Toyota may want to take this time to re-plan their cash reserves, invest heavily into R&D (reduced competitive pressure), but not necessarily change their luxury-to-"inferior" production ratio.
2. Canada's export revenue will definitely decline, but this is a burden that will be shared globally. Recovery will definitely have to occur at a global level to have maximum impact, although preventing significant domestic COVID-19-related damages would be beneficial.
3. I can't predict what pockets of opportunities may arise for investors via FDI, but keeping in mind elasticity, I'd definitely advice against investing in toilet paper and similar goods right now, for it is currently artificially inelastic due to higher demand and necessity.
4. For the income gap--in the short term I see limited impact besides potentially access to health-care in countries unlike Canada where there aren't universal healthcare programs. In the long run, the virus is bound to exacerbate the income gap simply due to unemployment, lost wages, and greater firm bottom-level cost-optimization vs. conventional top-level cost reduction.
Hope you stay safe and well Mr. Stewart,
Anish