The Canadian economy rebounded from a 1.3 per cent annualized rate of decline in the second quarter of 2016 to a 3.5 per cent annualized increase in the third quarter of 2016. This lesson plan explores the reasons for this rebound and accesses the sustainability of the strong economic growth in the third quarter.
Appropriate Subject Area(s):
Key Questions to Explore:
- What factors led to the strong economic performance of the Canadian economy in the third quarter of 2016?
- Why did exports surge in the third quarter?
- Why is the increase in consumption a positive indicator?
- Why have business investments in residential markets cooled?
- Why is the fall in business investments a negative indicator?
Real Gross Domestic Product (GDP), rebasing.
- Real GDP: Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.
- Rebasing: This process replaces an old base year for GDP comparisons with a new and more recent base year or price structure. This process helps reflect a more current snapshot of the economy. The UN Statistical Commission recommends countries rebase every five years to ensure that national statistics present the most accurate reflection of the economy possible, although some countries do it less frequently.
A copy of the article.
Introduction to lesson and task:
In the third quarter of 2016, the Canadian economy outperformed analysts’ expectations by growing at an annualized rate of 3.5%.
This growth was mainly due to an increase in exports of goods and services, driven by energy exports (up 6.1%); an increase in household consumption, driven by increased Canada Child Benefit to low and middle-income families, beginning in July, 2016; and finally, an increase in resource construction (up 0.7 percent), manufacturing (up 0.5 per cent), and retail trade (up 0.1 percent).
However, a number of trouble spots in the economy lingered. For example, residential investment was down 5.5 per cent annualized, business gross fixed capital formation fell 0.5 per cent, and investment in machinery and equipment fell 3.2 percent.
While most analysts are encouraged by these numbers, some are questioning their sustainability as the bulk of the gain can be attributed to one-offs like the resumption of energy production in Alberta. Others are troubled by the decline in business investments, which was believed to have bottomed out.
Real GDP is currently the go-to-measure for determining economic growth; however, there are some flaws with this metric which are worth exploring with your students. The main flaw with real GDP, as a measurement of the value of all goods and services produced by an economy in a given year, is that it fails to take into account the improvement in quality of goods and services delivered through innovation. It also fails to reflect new services like Facebook, Twitter and YouTube, which provide consumers with hours of entertainment and news, because they are free services.
Action (lesson plan and task):
- Ask your students to state the key factors that led to Canada’s real GDP growth in the third quarter.
- Ask your students to explain why upward revisions of prior quarter figures are “encouraging”.
- Ask your students to explain the main reason exports of goods and services surged by an annualized 8.9% in the third quarter. Also ask them to explain why this level of growth is probably unsustainable.
- Ask your students to explain why a huge emphasis is placed on household consumption to tell if the economy is doing well or not.
- Ask students to explain why the new tax on foreign real estate buyers in Vancouver led to weaker residential investment.
- Ask your students to state the consequences falling business investments and investments in machinery and equipment could have for economic growth.
Consolidation of Learning:
- Ask students to state some of the shortfalls of using real GDP as a measure of economic growth.
- After completing this lesson plan, students should have a better understanding of the performance of the Canadian economy and the outlook for the first half of 2017. Students should also have a better understanding of real GDP as a measurement of economic growth.
- Ask students to suggests actions that can be taken by the Bank of Canada and the Ministry of Finance to improve business investments.