Copyright © 2010 Nelson Education Ltd. All rights reserved. 1 1 Gross Domestic Product ●Money as the Measuring Rod: Real Versus Nominal GDP ♦GDP = The money values of all final goods and services produced in the domestic economy within the year ♦Nominal GDP (GDP in current dollars) values each good and service at the price at which it was actually sold during the year.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 2 2 The Economy on a Roller Coaster ●Growth, but with Fluctuations ♦Canada has seen significant fluctuations in economic growth, unemployment, and inflation. ♦Before WWII, the business cycle was particularly strong, the worst episode being the Great Depression of the 1930s.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 3 3 FIGURE 4: Nominal GDP, Real GDP, and Real GDP per Capita, Since 1961

Copyright © 2010 Nelson Education Ltd. All rights reserved. 4 4 FIGURE 5: The Growth Rate of Canadian Real GDP, Since 1871

Copyright © 2010 Nelson Education Ltd. All rights reserved. 5 5 FIGURE 6: The Inflation Rate in Canada, since 1868

Copyright © 2010 Nelson Education Ltd. All rights reserved. 6 6 The Economy on a Roller Coaster ●The Great Depression ♦A worldwide event most severe decline in economic activity ♦Caused a much-needed revolution in economic thinking ♦Until the 1930s, the prevailing economic theory held that a capitalist economy could cure recessions or inflations by itself

Copyright © 2010 Nelson Education Ltd. All rights reserved. 7 7 The Economy on a Roller Coaster ●The Great Depression ♦The Great Depression led John Maynard Keynes, one of the world’s most renowned economists, to write The General Theory of Employment, Interest, and Money (1936).

Copyright © 2010 Nelson Education Ltd. All rights reserved. 8 8 The Economy on a Roller Coaster ●The Great Depression ♦Keynes believed that: ■The economy did not naturally gravitate toward smooth growth and high levels of employment ■A pessimistic outlook could lead business firms and consumers to curtail their spending plans ■The economy could then be condemned to years of stagnation

Copyright © 2010 Nelson Education Ltd. All rights reserved. 9 9 The Economy on a Roller Coaster ●The Great Depression ♦In terms of the AD-AS framework, Keynes suggested that there were times when the AD curve shifted inward by large amounts. ♦The consequence would be declining output and deflation.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 10 The Economy on a Roller Coaster ●The Great Depression ♦Keynes showed how governments can manage their economies so that recessions will not turn into depressions and depressions will not last as long as the Great Depression.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 11 The Economy on a Roller Coaster ●From World War II to 1973 ♦During this period, the economy experienced some fairly mild business cycles, but grew considerably. ♦By the end of the period, inflation was rising.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 12 The Economy on a Roller Coaster ●The Great Stagflation, ♦The international price of oil was raised sharply in 1973 and again in ♦For that reason and some others, the period saw the emergence of stagflation, both unemployment and inflation increasing together.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 13 The Economy on a Roller Coaster ●The Mulroney Years, ♦From , the economy had moderate growth and disinflation. ♦NAFTA was adopted in 1989, rising oil prices was pushing up inflation. ♦Bank of Canada pushed up interest rates and the economy fell into a deep recession from ♦Budget deficits grew rapidly, GST introduced in ●The Mulroney Years, ♦From , the economy had moderate growth and disinflation. ♦NAFTA was adopted in 1989, rising oil prices was pushing up inflation. ♦Bank of Canada pushed up interest rates and the economy fell into a deep recession from ♦Budget deficits grew rapidly, GST introduced in 1991.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 14 The Economy on a Roller Coaster ●The Chretien/Martin Era, : Deficit Reduction and the “New Economy” ♦Anti-deficit strategy based on restrictive fiscal policy and expansionary monetary policy. ♦By mid-1990’s chronic federal deficits transformed into increasing surpluses. ♦Growth was strong, unemployment and inflation declined, globalization and computerization being key factors.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 15 The Economy on a Roller Coaster ●The Harper Years, 2006-: Domestic Tax Cuts and Global Finance ♦ Strong growth led to expanding consumer spending and rising housing sector. ♦Conservatives cut personal income, corporate and sales (GST) taxes. ♦Mortgage crisis in US, creates world wide financial crisis. ♦Recession in US creates slowing Canadian economy.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 16 The Problem of Macroeconomic Stabilization ●Combating Unemployment ♦When recessions are caused by too low aggregate demand, governments can try to stimulate demand.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 17 FIGURE 9 Stabilization Policy to Fight Unemployment Increase in output Price Level Real GDP S S D 0 D 0 E D 1 D 1 A

Copyright © 2010 Nelson Education Ltd. All rights reserved. 18 The Problem of Macroeconomic Stabilization ●Combating Inflation ♦When inflation is caused by too high aggregate demand, governments can try to restrain aggregate demand.

Copyright © 2010 Nelson Education Ltd. All rights reserved. 19 FIGURE 10: Stabilization Policy to Fight Inflation Decrease in prices Price Level Real GDP S S D 0 D 0 E D 2 D 2 B

Copyright © 2010 Nelson Education Ltd. All rights reserved. 20 The Problem of Macroeconomic Stabilization ●Does It Really Work? ♦Before 1940, the economy endured pronounced business fluctuations and inflation was rare. ♦Since World War II the business fluctuations have been much less severe, but inflation has been a common occurrence. ♦How successful government policy can be is a question to be explored throughout the text.