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1.You are to conduct an analysis of the Gross Domestic Product in Canada. Choose a period of between 1 and 5 years that you find interesting during the last 15 years. Use the Aggregate Demand and Supply Model and your own research to explain the movements in the Gross Domestic Product over this period. Note that data is available from the Trading Economics website  and the Bank of Canada's statistics website  Your answer should primarily use the Aggregate Demand and Supply Model but you may also use the Loanable Funds and the FX Loanable Funds Model in your analysis if you deem it appropriate.

2.Clearly explain what you believe is a plausible macroeconomic scenario for both Canada's economy and the world economy over the next 5 years. Under this scenario, how would you expect the Gross Domestic Product to change over the next 5 years?

GDP Trends of Canada (2003-2018)

Attributing to the international phenomena like that of Globalization, industrial revolutions, trade and commerce liberalization and also technological and infrastructural innovations, the global economy has been becoming more integrated, inclusive and connected. This in turn implies that the growth and dynamics of the economy of a country, in the present period, depends on its endogenous activities and attributes as well as on the exogenous factors which exist outside the concerned country but have considerable influence on the economic trends of the same.  

Keeping this into consideration, the concerned assignment tries to study the economic performance of one of the distinctively growing and economically prospering countries in the global scenario, the economy of Canada, specifically emphasizing on the performance of the same in the last fifteen years, thereby selecting a period in that time span, showing interesting economic dynamics.

As discussed above, Canada is one of the primary developed mixed economy in the contemporary global scenario, with substantial presence of a growing private sector as well as a robust and efficient public sector in the economy. Ranking tenth in terms of global nominal GDP and seventeenth in terms of purchasing power adjusted GDP, the country’s economy is dominated by a growing service sector and the country is also globally popular for the presence of huge natural resources and petroleum reserves and a stable manufacturing sector which has grown and prospered over the years.

To measure the economic performance of any country in a period, the primary indicator which is used is the dynamics in the Gross Domestic Product in the country at that period. Keeping this into consideration, the GDP of Canada over the past fifteen years can be seen to be as follows:

 

Figure 1: GDP of Canada (2003-2018)

As is evident from the above figure the GDP of the concerned country can be seen to show an impressive growth trend over the period of 2003 to 2018, with the trend being strictly positive in almost all parts of the concerned period. However, one exception can be seen in this otherwise impressively growing trend of Gross Domestic Product of the country, specifically during the time period of 2008-2009, when the parameter actually showed a declining trait.

 

Figure 2: GDP growth rate of Canada (2003-2018)

As is evident from the above figure, the growth rate of the GDP in Canada actually augments the findings in the trend of GDP of the country. The rates (both positive and negative) being subtle in other periods, however showed a massive decline during the period of 2008-2009, the decline being the biggest in the concerned time period.

GDP Performance of Canada (2007-2010) and the Global Financial Crisis

Thus, both from the GDP trend and from the dynamics of the growth rate of the same in Canada, it can be seen that the period between 2007-2010 is a period of interesting economic trend for the country and the following section of the assignment tries to emphasize on the economic activities in the concerned period in Canada.

To get a clear view of the GDP dynamics in the chosen period of interest, the following figure is taken into account:

 

Figure 3: GDP of Canada (2006-2010)

To understand the deviation clearly in the above figure, the GDP is measured from 2006-2010 and the trend clearly shows a visible decline from the second half of 2008, the same declining massively by 2009. However, the decline does not seem to sustain for a long period as the country quickly recovers from the shock and catches up with high GDP growth by 2010.

 

Figure 4: GDP growth rate of Canada (2006-2010)

As is clear from the above figure, the otherwise stable growth rate of the GDP of the country declined massively (to as low as -2.5) during the end of 2008 and continued till 2009 but the rate recovered abruptly and quite impressively and became positive by 2010, which is highly impressive.

The steep decline in the overall GDP statistics in the period of interest indicates towards some unusual economic phenomena which affected the economy of the country as a whole and the fast recovery from the problem also indicates towards the strategic and policy strengths of the country which worked efficiently in the concerned period.

The primary and the most important factor which can be considered to be the contributing to the huge decline in the GDP of Canada in 2008-2009 is the Global Financial Crisis which occurred at that point of time. The Global Financial Crisis, being considered as one of the worst global economic crisis till date, originated in the United States of America, primarily with the bursting of a sub-prime mortgage bubble but in no time turned into an international financial crisis and banking trouble, affecting not only the USA but also all the significant economies in the world and their financial system. This in turn also affected the economy of Canada to some extent like the other economies but however, the effects were not as severe and long lasting in Canada as was in other countries. To assert the same, the trends in GDP growth of the USA and Canada are compared and shown as follows:

Interest Rate Regulation and its Impact on Investment Dynamics and Aggregate Demand

 

Figure 5: Comparison of GDP dynamics of the USA and Canada (2006-2010)

As is evident from the above figure, though the decline in the GDP of Canada was more severe than that of the USA during 2008-2009, the former however picked up much faster than the latter as can be seen from faster growth of GDP of Canada than that of the USA, the growth of the former surpassing that of the latter from 2010.

One of the primary reason behind the fast and abrupt recovery of Canada can be cited as the stability and strength of the financial sector of the country, due to which the country did not actually experience any banking crisis unlike other countries whose financial and banking sector was immensely affected by the Global Financial Crisis which in turn contributed to the long term economic tensions in the other economies.

Loanable Fund Theory 

One of the primary variable in the money market is the rate of interest which prevails in the economy. According to the Loanable Funds Theory, this rate of interest is the price of the loanable funds (funds which are saved by people and lent out for investment instead of using it for personal consumption), which is determined by the demand and supply of loanable funds in the economy.

 

Figure 6: Determination of rate of interest by demand and supply of loanable funds

(Source: As created by the author)

This type of system was highly present in the banking system of the USA and many other economies of the world at that point of time, which, in the absence of regulation and strict monitoring contributed to the creation and persistence of the acute financial crisis.

However, the Canadian banking system is one where the government has considerable power and authority to control, charter and regulate the banks and their activities. At the onset of the crisis, the monetary authority of the country responded by hugely increasing the rate of interest in the country, thereafter decreasing the same from 2009, as can be seen from the following figure:

 

Figure 7: Rate of interest in Canada

The impacts of the interest rate regulation of the government can be explained with the help of the aggregate demand and supply model, which shows the dynamics of price and GDP of a country as effects of fluctuations of aggregate demand and supply in the country.

Empirical Evidence and Conclusion

In this context, the high interest rates in Canada, during 2007-2008, led to the decrease in Investment expenditures which in turn being a component of the aggregate demand of the country, led to the decrease in the aggregate demand at that point of time, the effects of which can be showed as follows:

 

Figure 8: Decrease in aggregate demand

(Source: As created by the author)

This in turn decreased the GDP of the country as can be seen from the above figures and also the price levels of the country. However, this was followed by a huge regulated fall in the interest rate, by the government of Canada in order to stimulate the economy. This in turn encouraged more investment activities, which in turn increased the aggregate demand in the economy:

 

Figure 9: Increase in aggregate demand

(Source: As created by the author)

This in turn helped in increasing the productivity as well as the GDP of the country as can be seen from its abrupt recovery from the crisis period.

This can be empirically supported with the help of the investment dynamics of the country, in the same period, which can be seen from the following figure:

 

Figure 10: Capital formation or investment in Canada (2006-2010)

As can be seen from the above figure, the investments which fell massively in Canada in 2008-2009, during the financial crisis, quickly recovered in the initial quarter of 2010 only and from then went on increasing steadily, which can be attributed to the regulated decline in the interest rate of the country. The increase in investment, thereby increased the aggregate demand of the country (as shown in Figure 10). This has also led to the creation of more jobs, which in turn increased consumption expenditure, thereby shifting aggregate demand even more:

 

Figure 11: Increase in consumption expenditure

(Source: As created by the author)

Along with this the country also experienced technological innovations and productive efficiency, which in turn led to the decrease in the cost of production, thereby increasing the aggregate supply of the economy:

 

Figure 12: Increase in both aggregate demand and aggregate supply

(Source: As created by the author)

Together these factors led to the increase in the overall economic activities in Canada, thereby helping the country to come out of the financial crisis and recessionary situations abruptly.

Conclusion 

From the above discussion it can be asserted that the economy of Canada, being one of the stable and prospering economies in the world, experienced considerable fluctuations and economic turmoil in 2008-2009, owing to the Global Financial Crisis. However, the economy managed to recover fast and impressively, much of which can be attributed to the strength of the financial and banking system of the country, the control and power of regulation of the financial system by the government of the country and the efficient and time appropriate insightful policies taken by the same to combat the crisis and in preventing the effects to be prolonged and more severe

The world economy as a whole has experienced considerable dynamics and growth over the last few years, performing robustly in almost all the macroeconomic indicators. The performance of the global economy can be primarily observed with the help of the dynamics observed in the Global Gross Domestic Product over the years, which measures the total value of the goods and services which are produced across the world over the years and in turn gives an insight about the overall productivity, employment, economic welfare and progress scenario of the world as a whole.

Thus, to understand the probable macroeconomic performance of the world in the next five years, it is of immense importance to take into account the dynamics in the global GDP in the last few years, which can be seen as follows:

Figure 13: Global GDP (2001-2016)

As is evident from the above figure, the GDP of the world, which fell massively in 2008, has however coped up and shows positive traits in the recent period.

In the coming years, this growth trend in expected to persist in the global scenario, provided there is no initiation of crisis of global magnitude. This can be asserted with the help of the following evidences:

  • Fast Recovery-The globally advanced economies, recovering fast from the economic downturn are seen to pick up fast which in turn indicates that they will continue to grow in the next five years. However, there growth rates are expected to slow down to some extent, especially for Japan, Korea, USA and Germany.
  • Emerging economies-The expected sluggish growth rates of the developed countries are expected to be more than compensated by the higher growth rate of the emerging economies like Brazil, China, India and South Africa.
  • Investment-The global investment is expected to increase in the coming years due to the promising trends showed by the world trade growth in the last few years, which in turn has led to creation of investment, especially in the developing economies.
  • Employment and Consumption demand-The world productivity is also expected to increase considerably and the Asian countries are also expected to experience huge growth in the manufacturing output and high technological products. This in turn is expected to create more employment scopes, thereby expectedly increasing the consumer confidence, expenditure and aggregate demand in the global economy.
  • Oil price and inflation-The crude oil price which rose considerably over the years, thereby creating inflationary pressure in the economies as a whole, is expected to decrease in the next four five years, which in turn is expected to improve the cost efficiency in production, supply and decrease the inflationary pressure in the global framework.
  • Bond and equity market-There are several possibilities of risky situations and vulnerabilities in the global equity market due to the fall of inflation and low rate of corporate and sovereign borrowers in the international scenario. However, given the possible growth of investment in the corporate and manufacturing sectors this market is also expected to prosper in the coming years.
  • Trade agreements-With the number of free trade agreements between different countries across the world increasing there are scopes of increase in the volume of trade and thus increase in the comparative advantages of the countries. However, with the NAFTA between USA and UK in renegotiation, there are chances of increase in regulatory realignments and trade barriers between these two global economic giants, which in turn can lead to the creation of inward looking policies and widening of external imbalances.

Given these situations and expected of the different macroeconomic indicators, the global economy is expected to grow impressively and prosper in the coming five years.

Economic Outlook of Canada 

The economy of Canada and its growth pattern, being that of an open economy has been synchronised with that of the growth trend of the global economy over the years. However, in the next five years there are some positive as well as some negative predictions for the economy of the country, which are as follows:

  • Decrease in export value-One of the primary event which is expected to benefit the global economy as a whole in the next five years is the reduction in the oil prices. However, Canada being a primary exporter of the same, decrease in the oil prices is expected to decrease the earnings from export for the country.
  • Inflation-The level of inflation in the economy is expected to be more or less constant in the coming years as there is no prediction of economic crisis in the country in the next five years.
  • Employment-In spite of the increase in the number of jobs added in the economy in the recent and coming years, the country is expected to experience a bit higher unemployment rates in the coming five years. This can be attributed to the fact that with the increase in the development of the service sector and with more resources directed to that sector, the new jobs created are mainly in this domain and at the cost of the agricultural and manufacturing sector jobs. The increasing migration in the country is also expected to contribute in increasing the unemployment significantly as most of the people migrating in the country are from the troubled developing or poor countries with basic skills and no substantial knowledge to get absorbed in the high skilled and capital-intensive service sector which is growing in the country in the contemporary times.
  • Rate of interest-The rate of interest in the country being considerably low in the recent period, the government of Canada is expected to increase the same in the coming years in anticipation of the increase in the rate of interest of the USA, which in turn may leas to a decrease in the investment activities as a whole.

Keeping these factors into consideration it may be expected that the economy of Canada will be growing in the next five years. However, the growth rate of the economy of the country is expected to slow down to some extent.

GDP prediction for Canada and for the world 

Keeping the above discussion into consideration, it can be effectively predicted that in the next five years, both the world economy as well as the economy of Canada are expected to experience an overall increasing trend in their productivities. However, due to its inherent issues as well as due to several exogenous factors like crude oil price decrease in the coming years, the increase in the productivity of Canada is expected to be a bit sluggish compared to the increase in the productivity of the global economy.

Keeping this into consideration, it can be asserted that in the next five years, both the global GDP as well as the Canadian GDP are expected to increase. However, the increase in the GDP of Canada is expected to be comparatively lower than the increase in the GDP of the world as a whole.

References 

Barua, Akrur. "Yearning for the good times." Global Economic Outlook: 36.

Berkmen, S. Pelin, et al. "The global financial crisis: Explaining cross-country differences in the output impact." Journal of International Money and Finance 31.1 (2012): 42-59.

Bertocco, Giancarlo. "On Keynes's Criticism of the Loanable Funds Theory." Review of Political Economy 25.2 (2013): 309-326.

Bordo, Michael D., Angela Redish, and Hugh Rockoff. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or…)?." The Economic History Review 68.1 (2015): 218-243.

Chor, Davin, and Kalina Manova. "Off the cliff and back? Credit conditions and international trade during the global financial crisis." Journal of international economics 87.1 (2012): 117-133.

Cross, Philip, and Philippe Bergevin. "Turning points: business cycles in Canada since 1926." (2012).

Data.worldbank.org. "GDP growth (annual %) | Data". Data.worldbank.org, 2018. Online. Internet. 12 May 2018. . Available: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.

Gervais, Olivier, and Marc-André Gosselin. Analyzing and forecasting the Canadian economy through the LENS model. Bank of Canada= Banque du Canada, 2014.

Hermansson, Cecilia. "Global Economic Outlook." Retrieved from (2012).

Holland, John H. "The global economy as an adaptive process." The economy as an evolving complex system. CRC Press, 2018. 117-124.

Kustec, Stan. The role of migrant labour supply in the Canadian labour market. Citizenship and Immigration Canada, 2012.

Onaran, Özlem, and Giorgos Galanis. "Is aggregate demand wage-led or profit-led." National and global effects?. Conditions of Work and Employment Series 31 (2012).

Rahman, Sajjadur, and Apostolos Serletis. "Oil price uncertainty and the Canadian economy: Evidence from a VARMA, GARCH-in-Mean, asymmetric BEKK model." Energy Economics 34.2 (2012): 603-610.

Rao, B. Bhaskara, ed. Aggregate demand and supply: A critique of orthodox macroeconomic modelling. Springer, 2016.

Schneider, Friedrich. "Size and development of the shadow economy of 31 European and 5 other OECD countries from 2003 to 2012: some new facts." Accessed June 13 (2012): 2015.

Tradingeconomics.com. "Canada GDP | 1960-2018 | Data | Chart | Calendar | Forecast | News". Tradingeconomics.com, 2018. Online. Internet. 12 May 2018. . Available: https://tradingeconomics.com/canada/gdp.

Tradingeconomics.com. "Canada GDP Growth Rate | 1961-2018 | Data | Chart | Calendar | Forecast". Tradingeconomics.com, 2018. Online. Internet. 12 May 2018. . Available: https://tradingeconomics.com/canada/gdp-growth.

Tradingeconomics.com. "Canada Gross Fixed Capital Formation | 1961-2018 | Data | Chart | Calendar". Tradingeconomics.com, 2018. Online. Internet. 12 May 2018. . Available: https://tradingeconomics.com/canada/gross-fixed-capital-formation.

Tradingeconomics.com. "Canada Interest Rate | 1990-2018 | Data | Chart | Calendar | Forecast". Tradingeconomics.com, 2018. Online. Internet. 12 May 2018. . Available: https://tradingeconomics.com/canada/interest-rate.

Tradingeconomics.com. "United States GDP | 1960-2018 | Data | Chart | Calendar | Forecast | News". Tradingeconomics.com, 2018. Online. Internet. 12 May 2018. . Available: https://tradingeconomics.com/united-states/gdp.

Vasishtha, Garima, and Philipp Maier. "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 (2013): 191-207.

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