1.  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

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

3.  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

4.  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

5.  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

6.  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

7.  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

9.  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