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Chapter 4: Macroeconomics: The Birds-Eye View of the Economy

Beginning of Macroeconomics
Before the Great Depression of the 1930s, classical economists believed that prices and wages
change quickly to keep industries at full capacity and to eliminate unemployment.
But during the Great Depression, unemployment was almost 20% in Canada (25% in the U.S.),
even though both wages and prices were falling.
So why was unemployment so high, and production so low? And what could the government have
done to help?
Macroeconomic Issues
Economic growth and living standards
Standard of living: the degree to which people have access to goods and services that improve their
lives.
Economic growth: increases in the quality and quantity of the goods and services the economy can
produce.
Figure 4.1 shows the rise of output in Canada over the 20th century.
Output per person: total output divided by the population.
Figure 4.2 shows that output per person has not risen as quickly as total output. This is because the
size of the population has also risen.
3Q 2014 real GDP: $1.754 trillion, 2.6% higher than previous year. Per person, this is over $49,000.
Productivity
Average labour productivity: output per employed worker.
If productivity grows slowly, living standards will improve slowly.
1950-1973: productivity grew at 2.4% per year.
1973-2010: productivity grew at 1% per year.
2013: 1.2%.

 Recessions and expansions

While output tends to rise over time, it does not rise at a steady rate: there are expansions (periods
of rapid growth) and recessions (periods of negative growth).
A depression is a very severe and long-lasting recession.
The term business cycle refers to the short-run ups and downs in output.
Unemployment
Unemployment rate: the fraction of the labour force that is looking for a job but cannot find one.
Figure 4.3 shows that unemployment varies over time, rising during recessions and falling during
expansions.
Unemployment represents lost potential output due to unused resources, and incurs many social
costs.
Unemployment rate in November 2014: 6.6%.
Inflation
Inflation: an increase in the overall price level.
Figure 4.4 shows that:
- in the 1970s, inflation reached over 15%.
- in the 1980s, the high point was around 12%.
- in the 1990s and 2000s, inflation tended to stay below 3%.
Inflation in November 2014: 2.0%.
Economic interdependence among nations
Trading imbalances occur when the amount of goods and services that a country buys from other
countries is different from the amount of goods and services that it sells abroad.
A trade surplus occurs if exports exceed imports.
A trade deficit occurs if imports exceed exports.
Figure 4.5 shows that Canada tends to run trade surpluses (but not since the 2008-2009 recession).
For 2013, Canadas exports of goods and services were $572 billion and imports were $602 billion,
providing a trade deficit of $30 billion.
Figure 4.6 shows the U.S. dollar-Canadian dollar exchange rate.

On December 31, 2014, the exchange rate was 0.8620 U.S. dollars per Canadian dollar.
Macroeconomic Policy
Three types of policies that the government uses to influence the macroeconomy:
Monetary policy: central bank management of interest rates to achieve macroeconomic objectives
Canadas central bank: the Bank of Canada
U.S.s central bank: Federal Reserve
Fiscal policy: decisions that determine the governments budget, including the amount and
composition of government expenditures and government revenues
The government collects taxes from households and firms, and uses them for spending on health,
infrastructure, social assistance, education, military, etc.
If spending exceeds taxes, the government has a deficit. If taxes exceed spending, the government
has a surplus.
Figure 4.7 shows Canadas budget balance between 1984 and 2010. The 2008-2009 recession led to
a budget deficit.
Figure 4.8 shows Canadas government debt, the sum of past government deficits and surpluses.
Structural policy: government policies aimed at changing the underlying structure, or institutions,
of the nations economy
Example: the move away from central planning towards a market economy in formerly communist
countries.