Understanding Economics BUSINESS CYCLES Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

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Presentation transcript:

Understanding Economics BUSINESS CYCLES Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Economic Growth  Economic growth can be defined in two ways the percentage increase in an economy’s total output (e.g. real GDP) is most appropriate when measuring an economy’s overall productive capacity the percentage increase in per capita output (e.g. per capita real GDP) is most appropriate when measuring living standards

Canada’s Economic Growth (a) Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved Per Capita Real GDP ($ 1992)

Economic Growth in Canada  Before World War I ( ), Canada’s per-capita output (in 1992 dollars) more than doubled from $2143 to $4896.  In the interwar period ( ), the country’s per-capita real output almost doubled from $896 to $8953.  In the postwar period (1945-), per- capita real output more than tripled to $27982 by Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Economic Growth and Productivity  Growth in per capita output is closely associated with growth in labour productivity which depends on factors such as the quantity of capital the quality of labour technological progress

Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Business Cycles (a)  The business cycle is the cycle of expansions and contractions in an economy an expansion is a sustained rise in real output a contraction is a sustained fall in real output a peak is the point in the business cycle at which real output is at its highest a trough is the point in the business cycle at which real output is at its lowest

The Business Cycle Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Real GDP Time EXPANSION CONTRACTION Long-Run Trend of Potential Output Recessionary gap Inflationary gap Peak Trough a b c d

Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Contractions  A contraction is usually caused by a decrease in Aggregate Demand (AD) magnified by the reactions of both households and businesses, who spend less due to pessimism about the future may be a recession, which is a decline in real output for six months or more may be a depression, which is a particularly long and harsh period of reduced real output

Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved. Expansions  An expansion is usually caused by an increase in AD magnified by the reactions of both households and businesses as they spend more due to more optimistic expectations of the future

Expansion and Contraction Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved Real GDP (1992 $ billions) Price Level (GDP deflator, 1992 = 100) 730 e f AS AD 0 Potential Output AD 1 Inflationary Gap Recessionary Gap