Canadian GDP Growth Analysis

The assignment delves into the world of macroeconomic analysis, focusing on Canada's Gross Domestic Product (GDP) growth rate. It examines the trade-off between residential investment and consumption spending, highlighting how increased investment in residential markets can lead to a decline in consumption demand, ultimately affecting GDP growth. The document also touches upon the bigger economic questions of what, how, and for whom to produce, illustrating how individual self-interest can sometimes conflict with social welfare. It provides references to relevant studies and publications on macroeconomics.

Running Head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Author note

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Table of Contents
Article Summary........................................................................................................................2
Economic concept......................................................................................................................2
Economic Analysis.....................................................................................................................3
Gross Domestic Product.........................................................................................................3
GDP growth...........................................................................................................................3
Actual and Potential GDP......................................................................................................4
Personal Connection...................................................................................................................5
Economic way of thinking.........................................................................................................6
Connection to big economic question........................................................................................6
Reference list..............................................................................................................................7

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Article Summary
 The statistics Canada has reported that in December GDP of Canada grew at a rate of
1.7 percent as opposed to the expected growth rate of 2 per cent (bnn.ca, 2018).
 The higher gains from housing market driven Canada’s GDP to a higher level. The
gain from housing market helped to counteract the decline in manufacturing and
construction.
 Last year, GDP was accounted a growth rate of 0.3 percent. This was the fastest
growth rate since 2011.
 In the fourth quarter, export has recovered recording an annual gain of 3 percent. The
export has regained after a recording a decline in the third quarter. Despite growth
recovery in the export sector, the external sector has continued to impose a drag on
the economy’s GDP with a higher share of import (bnn.ca, 2018)..
 Household spending has slowed down. This is due to a higher rate of household
saving. In the fourth quarter, the household saving rate rose to 4.2 percent from an
earlier rate of 4% in third quarter.
 Business has continued to add inventories in the economy. However, inventory has
declined slightly as compared to last quarter. The drag in inventory investment has
reduced GDP growth by 0.7%.
 An acceleration has been observed in non-residential business investment, which
grew by 8.2 percent in fourth quarter.
Economic concept
The article concerns with GDP of Canada and corresponding growth rate in GDP. The
relevant macroeconomics concepts that needs to be evaluated are GDP, different components

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of GDP, difference between actual and potential GDP and growth in GDP (Agénor, P. R., &
Montiel, 2015).
Economic Analysis
Gross Domestic Product
Gross Domestic Product measures the total monetary values of goods and services
produce in the nation in a particular period. There are different approaches for computing
GDP. The most commonly used approach is expenditure approach. The different components
of GDP under expenditure approach include consumption expenditure, investment
expenditure, government expenditure and net export (Bernanke, Antonovics & Frank, 2015).
Changes in any one components causes a significant change in GDP.
GDP = C + I + G + (X – M)
C: Consumption
I: Investment
G: Government expenditure
X: Export
M: Import
GDP growth
The growth in GDP is the percentage change in GDP between two consecutive years.
The quarter-to-quarter growth rate in GDP indicates the health of the economy
(Baharumshah, 2017). The Canadian economy has recorded a growth rate of 1.7% in the
fourth quarter. This hurts the analyst expectation of a 2 percent growth rate (bnn.ca, 2018).
The low or stagnant growth rate indicates deterioration of economic health of Canada. The
household spending and residential investment play an important role in determining GDP

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growth. In the fourth quarter of 2017, the residential investment in Canada rose by 13.4
percent. This is the strongest ever-housing investment in the economy since 2012. Gain from
the housing market has far exceeded the expectation regarding construction of new homes.
Buyers have high speculative demand for housing in response of tighter mortgage rule that
had been effectively implemented from 1st January (bnn.ca 2018). The increase in residential
investment has made significant contribution in GDP growth. Of the 1.7 percent growth, the
residential investment contributed 1 percentage point growth. The increase in residential
investment in turn reduces spending on household consumption. The consumption has slowed
down in the fourth and reached to the lowest level since 2016.
Figure 1: Quarterly GDP growth rate of Canada
(Source: tradingeconomics.com, 2018)
Actual and Potential GDP
Actual GDP is defined as measured value of goods and services in a nation at a
particular time interval. The potential GDP on the other hand measures the maximum level of
output that economy can produce by maintaining high employment across different sectors
and a stability in prices and currency. The unprecedented economic events prevents actual

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GDP from reaching to potential GDP (Heijdra, 2017). The difference between actual and
potential GDP is defined a GDP gap. At present, Canadian economy grows at around only its
potential level. This contrasts expectation of the analysts. They expect Canadian economy to
grow above its non-inflationary limit accounted in the last year. The trade uncertainties and
behavior of price level influences the decision of Bank of Canada in setting interest rate.
Figure 2: Actual and potential GDP
(Source: Mankiw, 2014).
Personal Connection
Gross Domestic Product is the most important macroeconomic indicators for
determining health of the economy. Therefore, in making macroeconomic analysis the
movement of GDP appears to be most important. GDP not only provides a measure of output
but also gives indication about future of the labor market or price level expectation. In the
phase of rising GDP, most of sectors in the economy perform well creating job opportunities
and hence improving the condition of labor market. GDP is an indicator of economic

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prosperity (Uribe & Schmitt-Grohé, 2017). A prosperous economy ensures satisfaction
among the citizens. Being a citizen of Canada the growth of output or GDP growth of Canada
seems as a vital aspect to scrutinize.
Economic way of thinking
The common problem that every economy face is the problem of choice. People have
unlimited wants while only limited means to satisfy these wants. Consequently, people faces
trade off in their everyday life. One common example of tradeoff is the distribution of income
between consumption and saving. The more people tend save the less they have to spend for
consumption (Mankiw, 2014). Now, consumption spending is an important component of
GDP. A situation of tradeoff is reflected between consumption and residential investment.
People in Canada in recent years have significantly increased their residential investment. For
raising investment in residential market, they have less income available for consumption
spending. Consumption demand has reached to a recorded low level since 2016. The
declining consumption spending have reduced growth in GDP.
Connection to big economic question
The two big economic questions are what, how and for whom to produce and whether
individual guided by self-interest maximizes the social interest. The question related to what,
how and for whom to produce is addressed by total output of the nation. GDP by capturing
total output produced provides answers to the first question (Bhaskar & Murray, 2015). In
many situation, though individual motivated by their self-interest maximizes welfare however
under certain circumstances this is unlikely to happen. In Canada, for example people in
order to maximize their gain from residential investment raises spending on such investment.
However, this is not good for the economy as a whole that has recorded a decline in the
recent growth rate.

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Reference list
Agénor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University
Press.
Baharumshah, A. Z. (2017). Open economy macroeconomics in East Asia. Routledge.
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-
Hill Higher Education.
Bhaskar, K., & Murray, D. F. (2015). Macroeconomic systems. Routledge.
Canadian GDP growth falls short of expectations in Q4 - Article - BNN. (2018). BNN.
Retrieved 26 March 2018, from https://www.bnn.ca/canadian-growth-falls-short-of-
expectations-in-q4-1.1015676
Canada GDP Growth Rate | 1961-2018 | Data | Chart | Calendar | Forecast.
(2018). Tradingeconomics.com. Retrieved 26 March 2018, from
https://tradingeconomics.com/canada/gdp-growth
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton
University Press.