Macroeconomics: An Insight into the Canadian Economy

The essay provides an insight into the Canadian economy, discussing GDP, unemployment, business cycle, monetary and fiscal policy, and future prospects.

Running head: ECONOMICS
Macroeconomics
Name of the Student:
Name of the University:
Author Note:

1MANAGEMENT
Introduction:
The essay provides an insight into the Canada. It commences with the present state of
economy and goes on to discuss the macroeconomic policy of the country thereby discussing the
various economic aspects like GDP, present rate of unemployment, present stage of the business
cycle, monetary and fiscal policy, exchange rate policy and the performance of the countries in
coming years.
Discussion:
The current state of the economy of Canada is referred a mixed economy which is highly
developed having the tenth largest Gross Domestic Product (GDP) through nominal and the
sixteenth largest Gross Domestic Product (GDP) through Purchasing Power Parity (PPP) across
the world. In comparison to the developed nations, the economy of the country remains
dominated by service industry those employees closer to about three quarters of the Canadians.
The nominal GDP of Canada was reported at about 2.052 percent in December 2018
which shows a decline from previous year when it was recorded at 4.356 percent in September
2018(Statistics Canada, 2018).The real GDP growth on the YoY data is quarterly updated in
Canada. It however stood at 3.1 percent from 1962 to 2019 for the month of March. This data
stood at all time higher of about 9.3 percent for March 1962 while it recorded all time lower of
about -4.1 percent for the month of December 1982(ceicdata.com, 2019) In Canada, the GDP
per capita reached at 46,409.8 USD for the month of June 2018 while the gross rate of savings
has been measured at about 18.6 percent for the month of March 2019.
The unemployment rate of the country remained lower than 6.0 percent in August
2017(Ragan, 2017). It is also to be noted that the unemployment rate was closer to 5.8 percent in

2MANAGEMENT
the month of January which was higher than 5.6 percent recorded in the month of December. The
country has an inflation rate of 2 percent in the month of April which has been higher than the
recorded 1.9 percent in the month of March. The interest rate of the country has been raised by
25bp to about 1.75 percent which represented an overall increase in 1.25 percent. The exchange
rate of the country has been 1 Canadian Dollar being equivalent to about 0.75 USD
(tradingeconomics.com, 2019).
When equilibrium is achieved at output below the potential GDP then there is existence
of recessionary gap while when equilibrium at real GDP exceeds the potential GDP then a
country experiences inflationary gap. Canada experiences recessionary gap since the potential
GPP portrayed by the long run aggregate supply curve (LAS) lies above the equilibrium
(Champagne, Poulin‐Bellisle & Sekkel, 2018).
Figure 1: Long Run Equilibrium: Shift in the Aggregate Demand
Source: (Berger & Kempa, 2014)

3MANAGEMENT
The macroeconomic policy of the country is divided into two broader categories, the
fiscal and the monetary policy (Bank of Canada, 2018). Fiscal policy represented set of decisions
that the government made with respect to spending, borrowing and taxation. Government at all
the levels including the federal, municipal and the provincial have fiscal policy since they
possess the ability of raising the revenues through certain forms of taxation and spending the
resources on the services and the goods. However the monetary policy of Canada has three vital
characteristics which include:
 Monetary policy is implemented by Bank of Canada which government is owned
corporation that operates with certain amount of independence from federal government
and remains accountable to the Parliament.
 As the financial capital can easily move with the Canada the interest rate remains the
same on the similar assets across all the Canadian regions. Hence, there is a single
monetary policy for Canada. The Bank however remains the sole issuer of the legal
tender in the country.
 The Bank of Canada sticks to a single policy instrument in spite of several economic
variables influencing its decisions.
It has been found that the real GDP is growing in Canada at a rate of 0.4 percent in last three
months of the current year (Vasishtha & Maier, 2013). The GDP per capita of the country has
been recorded at 44017.59 US dollars in the year 2017 when it is adjusted through purchasing
power parity (PPP). The per capita GDP when adjusted through Purchasing Power Parity stands
at closer to 248 percent of world’s average. The GDP per capita on PPP basis in the country
stood at 44017.59 USD in the year 2017 from a lower record of 30115.28 USD in the year 1992.
In other words it has rising.

4MANAGEMENT
Figure 2: Table Showing Relevant Data for the Last Couple of Months
Source: (deloitte.com, 2019)
NAIRU stood for the non accelerating rate of inflation for unemployment and referred to
the theoretical levels of the unemployment under which the rate of inflation is expected to
increase(Marjanovic & Mihajlovic, 2016). The unemployment rate of Canada reduced to about
5.4 percent for the month of May 2019 from closer to 5.7 percent in previous month which have
been below the market expectations. It was also one of the lowest comparable data’s made
available since the year 1976. The Canadian economy is believed to add close to 27.7 jobs in the
full time positions. The Bank of Canada has the mission of reaching full employment with the
inflation rate targeted at 2 percent. Thus, the current inflation rate was lower than NAIRU.
The economy of Canada has entered the stage of the business cycle where it experiences
slow economic growth (Hamilton & Raj, 2013). It has been found that the economic growth of
the country reduced from 3.0 percent in the year 2017 to 1.8 percent in the last year. It is
believed that the economic growth of Canada would substantially bounce back in early 2019

5MANAGEMENT
with reduced inventories and modest household spending. There is a recessionary gap in the
Canadian economy since the economy almost came to a standstill at the later part of 2018 with
GDP growth of only 0.1 percent in fourth quarter and 0.4 percent annually.
It is to be noted that country presently follows an expansionary monetary and fiscal
policy. This is because during 2014, the declining prices of oil led to a slower growth of
Canadian economy during first quarter of the 2016. This led to a fall in the profits of the bank
thereby making them vulnerable to the recession. Canada in order to keep up with the lower oil
prices enacted the expansionary monetary policy through reducing the rate of interest. This
expansionary policy boosted the domestic economic growth of Canada.
However as far as the exchange rate policy is concerned, Canada became one of the first
countries in adopting the floating rate of exchange (Neely, 2015). However, it was in the year
1962 that the country returned to the fixed exchange rate only to return back to floating the
currency in the year 1970. Overall Canadian dollar have floated for about 42 times in the last
fifty years.
In the coming years the economy of Canada will experience a slower growth. Besides,
the fall in the oil prices and lack in the capacity of pipeline continued in constraining the
investment in the energy sector of Canada. The future of Canada seems bright with a prediction
that increasing number of young Canadian would focus lesser on the finding of a job and also
ensure the creation of one thereby reflecting a reduction in the rate of unemployment. This also
implies unemployment and the inflation rate would change. However as per the records of
March 2019 the unemployment rate remained fixed at 5.8 percent while the annual rate of
inflation reduced to 1.4 percent and remained below the expectations of the market.

6MANAGEMENT
Conclusion:
On a concluding note, it can be said that the country provides an in depth insight into the
Canadian economy with a focus on GDP and other macroeconomic factors. Through the essay
one is also able to develop an overview as to how the future of Canada would look.

7MANAGEMENT
References:
Bank of Canada. (2018). Bank of Canada. Retrieved from http://www.bankofcanada.ca/
Berger, T., & Kempa, B. (2014). Time-varying equilibrium rates in small open economies:
Evidence for Canada. Journal of Macroeconomics, 39, 203-214.
ceicdata.com. (2019). Retrieved from https://www.ceicdata.com/en/indicator/canada/real-gdp-
growth
Champagne, J., Poulin‐Bellisle, G., & Sekkel, R. (2018). The Real‐Time Properties of the Bank
of Canada's Staff Output Gap Estimates. Journal of Money, Credit and Banking, 50(6),
1167-1188.
deloitte.com. (2019). Retrieved from
zhttps://www2.deloitte.com/insights/us/en/economy/americas/canada-economic-
outlook.html
Hamilton, J. D., & Raj, B. (Eds.). (2013). Advances in Markov-switching models: applications in
business cycle research and finance. Springer Science & Business Media.
Marjanovic, G., & Mihajlovic, V. (2016). An analysis of the factors of NAIRU dynamics in
selected OECD countries. Argumenta Oeconomica, 1(36), 87-103.
Neely, C. J. (2015). Unconventional monetary policy had large international effects. Journal of
Banking & Finance, 52, 101-111.
Ragan, C. T. S. (2017). Macroeconomics (15th Canadian ed.). Don Mills, Canada: Pearson
Education Canada.

8MANAGEMENT
Statistics Canada. (2018). Statistics Canada. Retrieved from http://www.statcan.gc.ca/start-
debut-eng.html
tradingeconomics.com.(2019). Retrieved from
https://tradingeconomics.com/canada/unemployment-rate
Vasishtha, G., & Maier, P. (2013). The impact of the global business cycle on small open
economies: A FAVAR approach for Canada. The North American Journal of Economics
and Finance, 24, 191-207.