Understanding Economics BUSINESS CYCLES

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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 Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Canada’s Economic Growth (a)

30 000 20 000 10 000 5 000 4 000 3 000 2 000 0 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 1999 Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Economic Growth in Canada

   Before World War I (1870-1914), Canada’s per-capita output (in 1992 dollars) more than doubled from $2143 to $4896.

In the interwar period (1914-1945), 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 1999.

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 Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

The Business Cycle

Inflationary gap Peak

a b

CONTRACTION EXPANSION Long-Run Trend of Potential Output

c

Recessionary gap

d

Trough Time 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 Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Expansion and Contraction

240 160

e

Potential Output

f

AS AD 0 0 AD 1 700 725 730 Real GDP (1992 $ billions) Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.

Inflationary Gap Recessionary Gap

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