Short-Run vs Long-Run National accounts 1

 Think about Canadian GDP over last 50 years  Here it is Here it is  If you had to draw it now without looking at it, what would you draw?  Upward  Random ups and downs  Bigger ups and downs you’d notice if know more about economic history  Actual GDP  Potential GDP 2

 Actual GDP  Reported by Statistics Canada  Potential GDP  “theoretical” construct  But shows a very “real” thing  The trend  Or LONG-RUN development  How would you determine potential GDP?  That’s what we would have if we…  fully utilized…  all the factors of production…  with the best technology 3

 GDP accounting  GDP = GDP  GDP = (F/F) × (F E /F E ) × GDP  GDP = F × (F E /F) × (GDP/F E )  Compare this to English in previous slide:  That’s what we would have if we…  fully utilized…  all the factors of production…  with the best technology  GDP = F × (F E /F) × (GDP/F E ) 4

 We have here:  GDP = F × (F E /F) × (GDP/F E )  F = factor supply  (F E /F) = factor utilization rate  (GDP/F E ) = factor productivity 5

 How these change:  GDP = F × (F E /F) × (GDP/F E )  F = factor supply  Slow relatively small change in short run  Significant change in long run  Look at labour  population population  LFPR 6

 (GDP/F E ) = factor productivity  Slow relatively small change in short run  Significant change in long run  Look at labour  productivity 7

 (F E /F) = factor utilization rate  Quick change in short run  Small/no change in long run  it’s like temperature and same problems of predicting  Look at labour  unemployment 8

 Not hard to sum up?  GDP = F × (F E /F) × (GDP/F E ) will change if any part of it changes  Short run:  F = factor supply - LITTLE CHANGE  (F E /F) = factor utilization rate – SIGNIFICANT CHANGE  (GDP/F E ) = factor productivity - LITTLE CHANGE  Long run:  F = factor supply - SIGNIFICANT CHANGE  (F E /F) = factor utilization rate - LITTLE CHANGE  (GDP/F E ) = factor productivity - SIGNIFICANT CHANGE 9

 But think about it:  F = factor supply - determines AS (position of the curve)  (GDP/F E ) = factor productivity - determines AS (position of the curve)  (F E /F) = factor utilization rate - determines what point we are at AS  Think AD-AS model:  AS is a curve  A point we are at on AS is determined by position of AD curve  We say that short run fluctuations are demand-driven  We say that long run fluctuations are supply-driven 10

 What does it mean for policies?  A policy that affects AD is targeting short-run…  fluctuations  business cycle  unemployment  factor utilization  A policy that affects AS is targeting long-run…  economic growth  Most policies have both short-run and long-run effects  Think lowering interest rate, e.g. 11