Economic Growth in Canada Before World War I (1870 – 1914) Canada’s growth was gradual Until 1973, there was steady growth in per-capita

income (2%/yr)

The Interwar Period (1914-1945) More unstable growth during WWI Overall, per-capita real output almost doubled from

$5283 to $9660

10.5 Economic Growth and Business Cycles

The Postwar Period (1945 – Present) Canada shares in worldwide rise in prosperity Achieved fairly steady growth standards of ~2%

annually

Economic Growth in Canada

As a rule, as sustained rise in real output, known as a period of expansion or recovery, is followed by an extended period of falling real output, known as a contraction. These rises and falls in real output constitute a pattern known as the business cycle.

Business Cycles

inflation

Actual Versus Potential Output When actual output exceeds potential output, the

resulting inflationary gap is the difference between these quantities

A recessionary gap occurs by the amount by which real output falls short of its potential output

Business Cycles

inflation

An economy reaches its peak when it is experiencing a boom Real GDP is at its highest value in the business cycle Inflationary gap has reached its maximum width Unemployment is at its lowest possible level From this point on, the economy contracts

Contraction

inflation

The Role of Expectations Households vary consumption expenditures

depending on their anticipation of future prices and incomes

Businesses decide how much to invest on the basis of estimates of future profit

A lot of future expectations are made by simply extending current trends

Problem with this, is that this creates a downward spiral in which declines in real output lead to further declines in spending and in output

Contraction

Effects of a Contraction Periods of contraction lead to a decrease in aggregate

demand, shifting the demand curve to the left This causes equilibrium output to fall

Recessions & Depressions A decline in real output that lasts for 6+ months is a

recession If reduction in real output is particularly long and

harsh, it is a depression

Contraction

A downward cycle does not last indefinitely Once one reaches the trough, where real output is at

its lowest value in the business cycle, the economy re-enters a phase of expansion

The Role of Expectations Initial spending leads to optimistic forecasts of

continuing growth; consumption, investments & exports all increase

Effect of an Expansion Aggregate demand shifts to the right (increases) Recessionary gap is turned into an inflationary gap

Expansion