First-year courses · Social sciences

Macroeconomics: Canada's economy and policy

Canadian macroeconomics flashcards: GDP, unemployment, CPI inflation, the Bank of Canada's 2% target, monetary and fiscal policy, exchange rates and trade.

42 cards7 topicsAbout 15 minutes a roundTypical first-year Principles of Macroeconomics with Canadian examples

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About this deck

Macroeconomics looks at the economy as a whole: total output, jobs, the price level, interest rates and trade with the rest of the world. This deck uses Canadian institutions throughout, including Statistics Canada's main measures, the Bank of Canada and its inflation-control target, federal fiscal policy, and the Canadian dollar in a floating exchange rate system.

It helps to have finished a microeconomics course or at least to understand supply and demand graphs, since the aggregate demand and aggregate supply model works in a similar way. Know the difference between a level (how big something is) and a rate (how fast it is changing): GDP is a level, growth and inflation are rates.

When you study a policy card, trace the chain of effects in order. For a cut to the policy interest rate, for example: borrowing costs fall, spending and investment rise, the dollar tends to weaken, demand for goods and services increases, and inflation pressure builds over time. Writing these chains out is excellent exam practice.

Common mistakes include confusing nominal and real values, assuming that falling inflation means falling prices (it means prices rise more slowly), and mixing up the deficit (a one-year shortfall) with the debt (the total accumulated over time). Remember also that the Bank of Canada runs monetary policy while Parliament and the federal government decide fiscal policy.

Before you start: High school algebra; a microeconomics course is helpful but not required.

All 42 cards

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Output and growth

Gross domestic product (GDP): The market value of all final goods and services produced within a country's borders in a given period.Example: Statistics Canada publishes this measure monthly by industry and quarterly by expenditure.
Expenditure approach: Measuring total output as C + I + G + (X - M): household consumption, business investment, government purchases and net exports.Example: A Quebec family buying a new fridge counts in consumption.
Nominal GDP: Total output valued at the prices of the year it was produced, so it rises with both more production and higher prices.Example: It can grow even in a year when real production falls, if prices rose enough.
Real GDP: Total output valued at constant base-year prices, which removes the effect of inflation and shows changes in actual production.Example: Used to judge whether the economy truly grew.
GDP deflator: Price index equal to nominal output divided by real output, times 100, covering all goods and services produced domestically.Example: A value of 110 means prices are 10% above the base year.
Business cycle: Recurring short-run swings in economic activity around its long-run trend, with expansions, peaks, contractions and troughs.Example: The sharp drop in spring 2020 and recovery afterward.
Recession: A significant, broad decline in economic activity; often roughly flagged by two consecutive quarters of falling real GDP.Example: In Canada the C.D. Howe Institute's Business Cycle Council dates these episodes.

Labour market

Labour force: People aged 15 and over who are either employed or unemployed and actively looking for work.Example: A full-time student who is not working or looking is not counted in it.
Unemployment rate: The number of people without work who are available and searching, divided by the labour force, expressed as a percentage.Example: If 1.5 million are jobless and searching out of 21 million in the labour force, the rate is about 7.1%.
Labour Force Survey: Statistics Canada's monthly household survey that produces the official unemployment rate and other job estimates.Example: Results are released early in the following month, usually on a Friday.
Participation rate: The labour force as a percentage of the population aged 15 and over.Example: An aging population tends to lower this rate as more people retire.
Frictional unemployment: Short-term joblessness that occurs while people move between jobs or search for their first one.Example: A new graduate spending two months applying for jobs.
Structural unemployment: Joblessness caused by a mismatch between workers' skills or locations and the jobs available.Example: Workers laid off from a closed mill whose skills do not match local openings.
Cyclical unemployment: Joblessness caused by a downturn in overall spending in the economy.Example: Layoffs across many industries during a recession.
Natural rate of unemployment: The jobless rate when the economy is at full employment, made up of frictional and structural unemployment only.Example: Even a healthy economy has some people between jobs.

Prices and inflation

Consumer Price Index (CPI): Statistics Canada's monthly measure of the change in prices of a fixed basket of goods and services bought by Canadian households.Example: The basket includes shelter, food, transportation, clothing and more.
Inflation: A sustained rise in the general level of prices, usually measured as the yearly percentage change in the CPI.Example: If the CPI rises from 150 to 154.5 over a year, the rate is 3%.
Deflation: A sustained fall in the general price level, meaning the yearly change in the price index is negative.Example: Japan experienced long periods of this in the 1990s and 2000s.
Core inflation: Measures of underlying price change that remove volatile items or extreme moves; the Bank of Canada highlights CPI-trim and CPI-median.Example: Used to look past a one-time jump in gasoline prices.
Real interest rate: The nominal interest rate minus the expected inflation rate; it reflects the true cost of borrowing.Example: A 5% loan with 3% inflation has a rate of about 2%.

Monetary policy

Bank of Canada: Canada's central bank, created by statute in 1934, responsible for monetary policy, bank notes, the financial system and managing federal debt operations.Example: It is owned by the federal government but sets interest rates independently.
Inflation-control target: Goal agreed by the Government of Canada and the central bank to keep total CPI inflation at 2%, the midpoint of a 1% to 3% range, renewed every five years.Example: The 2021 renewal covers the period to the end of 2026.
Policy interest rate: The Bank of Canada's target for the overnight rate, the rate at which major financial institutions lend to each other for one day.Example: Changes to it ripple into prime rates, variable mortgages and lines of credit.
Fixed announcement dates: The eight scheduled days each year on which the Bank of Canada announces its interest rate decision.Example: Markets watch these dates closely for any change in the rate.
Monetary policy transmission: The chain through which a change in the policy rate affects borrowing, spending, the exchange rate and eventually inflation, often over six to eight quarters.Example: A rate cut lowers mortgage costs, raising home and consumer spending.
Quantitative easing: Central bank purchases of government or other bonds to push down longer-term interest rates when the policy rate is already very low.Example: The Bank of Canada used large bond purchases in 2020 and 2021.
Contractionary monetary policy: Raising interest rates to slow spending and reduce inflation pressure.Example: The series of rate increases that began in March 2022.

Fiscal policy

Fiscal policy: Government use of spending and taxation to influence the economy.Example: Federal pandemic income support programs in 2020.
Budget deficit: The amount by which government spending exceeds revenue in a single year.Example: If Ottawa spends $500 billion and collects $460 billion, this is $40 billion.
Government debt: The total accumulated amount owed by a government from past annual shortfalls minus surpluses.Example: Often reported as a percentage of GDP to compare across countries.
Automatic stabilizers: Taxes and transfers that change on their own with the business cycle, softening booms and downturns without new decisions.Example: Employment Insurance payments rise during a recession.
Spending multiplier: The idea that an initial change in spending leads to a larger total change in GDP because one person's spending becomes another's income.Example: A new $1 million bridge project leads workers and suppliers to spend part of their earnings.
Crowding out: Reduction in private investment that can happen when government borrowing pushes up interest rates.Example: A firm delays building a warehouse because borrowing costs rose.

Aggregate demand and supply

Aggregate demand: The total quantity of goods and services that households, firms, governments and foreigners want to buy at each overall price level.Example: A rise in exports to the United States increases it.
Short-run aggregate supply: The total output firms are willing to produce at each price level when some input costs, like wages, are slow to adjust.Example: A sudden oil price jump shifts this curve left.
Stagflation: A combination of high inflation and weak or falling output with rising unemployment, often after a supply shock.Example: The oil price shocks of the 1970s.

International

Exchange rate: The price of one currency in terms of another.Example: One Canadian dollar trading for 0.73 US dollars.
Floating exchange rate: System in which a currency's value is set by supply and demand in foreign exchange markets; Canada has used it since 1970.Example: The loonie tends to strengthen when oil prices rise.
Currency appreciation: A rise in the value of one currency relative to another, making imports cheaper and exports more expensive abroad.Example: A stronger loonie makes cross-border shopping in the US more attractive.
Balance of payments: A record of all economic transactions between residents of a country and the rest of the world over a period.Example: Statistics Canada publishes Canada's international accounts quarterly.
Current account: Part of the international accounts covering trade in goods and services, investment income and transfers.Example: A deficit here means more is paid to foreigners than received for these items.
Financial account: Part of the international accounts recording cross-border purchases and sales of assets, such as shares, bonds and direct investment.Example: A foreign firm buying a Canadian company is recorded here.