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Understanding Short-Run vs. Long-Run National Accounts in Canadian GDP

This analysis explores the differences between short-run and long-run national accounts through the lens of Canadian GDP over the past 50 years. The short-run is characterized by sudden fluctuations in actual GDP while the long-run reflects potential GDP, a theoretical construct where all production factors are fully utilized with optimal technology. Policies targeting aggregate demand (AD) influence short-run fluctuations, whereas those affecting aggregate supply (AS) drive long-run economic growth. Understanding these dynamics is essential for effective economic policy.

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Understanding Short-Run vs. Long-Run National Accounts in Canadian GDP

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  1. Short-Run vs Long-Run National accounts

  2. Think about Canadian GDP over last 50 years • Here it is • If you had to draw it now without looking at it, what would you draw? • Upward • Random ups and downs • Bigger ups and downs you’d notice if know more about economic history • Actual GDP • Potential GDP

  3. Actual GDP • Reported by Statistics Canada • Potential GDP • “theoretical” construct • But shows a very “real” thing • The trend • Or LONG-RUN development • How would you determine potential GDP? • That’s what we would have if we… • fully utilized… • all the factors of production… • with the best technology

  4. GDP accounting • GDP = GDP • GDP = (F/F) × (FE/FE) × GDP • GDP = F × (FE/F) × (GDP/FE) • Compare this to English in previous slide: • That’s what we would have if we… • fully utilized… • all the factors of production… • with the best technology • GDP = F × (FE/F) × (GDP/FE)

  5. We have here: • GDP = F × (FE/F) × (GDP/FE) • F = factor supply • (FE/F) = factor utilization rate • (GDP/FE) = factor productivity

  6. How these change: • GDP = F × (FE/F) × (GDP/FE) • F = factor supply • Slow relatively small change in short run • Significant change in long run • Look at labour • population • LFPR

  7. (GDP/FE) = factor productivity • Slow relatively small change in short run • Significant change in long run • Look at labour • productivity

  8. (FE/F) = factor utilization rate • Quick change in short run • Small/no change in long run • it’s like temperature and same problems of predicting • Look at labour • unemployment

  9. Not hard to sum up? • GDP = F × (FE/F) × (GDP/FE) will change if any part of it changes • Short run: • F = factor supply - LITTLE CHANGE • (FE/F) = factor utilization rate – SIGNIFICANT CHANGE • (GDP/FE) = factor productivity - LITTLE CHANGE • Long run: • F = factor supply - SIGNIFICANT CHANGE • (FE/F) = factor utilization rate - LITTLE CHANGE • (GDP/FE) = factor productivity - SIGNIFICANT CHANGE

  10. But think about it: • F = factor supply - determines AS (position of the curve) • (GDP/FE) = factor productivity - determines AS (position of the curve) • (FE/F) = factor utilization rate - determines what point we are at AS • Think AD-AS model: • AS is a curve • A point we are at on AS is determined by position of AD curve • We say that short run fluctuations are demand-driven • We say that long run fluctuations are supply-driven

  11. What does it mean for policies? • A policy that affects AD is targeting short-run… • fluctuations • business cycle • unemployment • factor utilization • A policy that affects AS is targeting long-run… • economic growth • Most policies have both short-run and long-run effects • Think lowering interest rate, e.g.

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