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File:Canadá (Serarped).png

GDP: $1.53 trillion
Inflation rate: 2.3%
Unemployment rate: 5.8%
GINI index: 0.34

Macroeconomic Objectives

For any country to strive, it is necessary to improve in the 4 macroeconomic objectives: Inflation, unemployment, income inequality, and economic growth. For Canada, this includes keeping a low and stable rate of inflation, low unemployment, economic growth, and a society where income is more equitable.

Current Status

As aggregate demand shifts from AD1 to AD2, inflation occurs shifting prices from P1 to P2. Employees ask for higher wages increasing cost of production for firms. Firms lay off employees to cut costs shifting SRAS1 to SRAS2. The result are higher prices at P2 and no economic growth (Y1).

Inflation

Canada’s current rate of inflation reached 2.3% as of April 2018, and has kept up with the Bank of Canada’s goal of a low and steady inflation rate of 2%, with a 0.7% increase in the inflation rate from April of 2017 to 2018 . To keep the inflation rate at a low and stable rate, The Bank of Canada has introduced policies by regularly adjusting short term interest rates . As low interest rates lead to increase borrowing and spending, if aggregate demand shifts at a greater pace than expected, setting high interest rates can bring spending down which consequently brings inflation down to a lower rate. If the inflation rate continues to grow at the same rate it has in the last year, and government policies fail to control inflation, than a wage spiral effect is likely to be an outcome. A wage spiral occurs when employees ask for increased wages when prices are rising. As this increases cost of production for firms, the unemployment rate increases as firms have to cut costs by laying of employees, resulting in inflation and little to no economic growth. Alternatively, a positive correlation to inflation is economic growth, as boosts in consumption or aggregate demand indicate growth in GDP.

Increase in quantity of factors of production leads to a shift in the long run aggregate supply to the right. The result is an increase in potential output which can be seen by a shift of the whole PPC to the right

Economic Growth

The economic growth rate has stayed at a steady rate of 0.4%, with a GDP of 1.53 trillion.. Canada’s revenue from exports has gone up from $44679.2 million in 2017 to $47584 million in 2018, as well as a positive increase in consumption due to greater consumer confidence . These boosts in consumption and exports indicate economic growth in Canada's economy, largely due to the implementation of policies such as the Hamburg Plan, which took effect in 2017. The Hamburg plan includes policies to increase investments in infrastructure in areas such as public transport . Since labor is needed for the construction, the investments create jobs, decreasing unemployment. Thus, shifting long run aggregate supply as there is an increase in quantity of factors of production. The result is an increase in potential output which is indicated by a shift to the right of the production possibility curve. However, the pursuit of economic growth can be at the expense of sustainability of resources. Since Canada’s main source of revenue is exporting oil, the negative impacts on the environment from extracting crude oil can be devastating.

From 2010 to 2013, the GINI coefficient rose 1.19% from 0.336 to 0.34. This increase results in greater income inequality, as indicated on the Lorenz curve where the 2013 curve moves further away from the line of equality than does 2010.

Income Inequality

Canada’s income inequality has worsened, as the GINI coefficient has increased over the last 10 years. The GINI coefficient is a measure of dispersion intended to represent the income/wealth distribution in a country. A value closer to 0 represents a more equitable society, whereas a value closer to 1 represents greater inequality. As of 2013, the GINI coefficient is 0.34, with a 1.19% increase from 0.336 since 2010 . Compared to the rest of the world, Canada holds a strong GINI coefficient ranking 26th in the world. However, increase in the GINI coefficient illustrates more inequality. Several efforts have been made to solve this issue, such as the Trudeau plan. The prime minister of Canada implemented policies in 2017 to increase the top marginal income tax rate. By viewing the wealth distribution, it can be determined that the top 20% of income earners account for 49.1% of all income in the economy, and the bottom 50% of income-earning families account for 20% of all income. The tax rate has drastically increased on the highest income from 29% to 33%. These policies are favorable in improving income inequality as it redistributes wealth in the economy as the government can use the tax money for transfer payments and providing socially desirable goods for lower income individuals. However, higher taxes would hurt the government's goal of attracting talented entrepreneurs as their would be a lower incentive to go into these high income fields.

As the unemployment rate decreases from U1 to U2, the inflation rate increases from i1 to i2.

Unemployment

As of April 2018, the unemployment rate has reached an all-time low of 5.8% for the third consecutive month; a significant decrease of 1.4% from 2016. There has also been an increase in employment of 29,000 in the core-age population (25-54), of which 20,000 were contributed by the increase in female employment . Decreases in the unemployment rate are largely due to major advances in the active labor market policies (ALMP). The ALMP are programs and policies designed to help unemployed people find work. Programs and policies include: job search assistance, direct-job creation, and training . These programs and policies provide benefits to the economy as people gain valuable skills and training which help them seek employment. The program received a boost in funding in 2015, and helped 50,000 individuals seek employment in 2017 alone, accounting for 18.3% of total employment in 2017. The result of this policy is an increase in quality and quantity of labor, boosting potential output in the economy. Finally, one consequence of a low unemployment rate is inflation. According to the Phillips curve, as the unemployment rate decreases, inflation increases inversely.

Solution to Income Inequality

The growing income inequality problem in Canada can be solved by increasing the amount of transfer payments for low income families. The current GINI coefficient of Canada is 0.34 as of 2013, rising 1.19% from 2010. Transfer payments are transfers of money from the government to lower income families for no exchange of goods and services. By providing these transfer payments, the lowest income will be able to purchase basic necessities. The increase in income addresses the problem because the low income families have a greater ability to purchase goods and services. This also improves the quality of life for the low income families and brings many people out of poverty. Since the money for transfer payments are supplied by taxes, and the taxes in Canada are progressive, the wealth of the higher income family decreases, while the wealth of lower income families increases. However, this policy has potential drawbacks. For instance, if the government is using tax money to provide the transfer payments, than the there is an opportunity cost as the tax money can no longer be used for other purposes. Additionally, the process of getting the transfer payments to the individuals is labor intensive and inefficient, as money has to be spent towards salaries for those who work to provide the service and the several intermediate steps in between. It is also inefficient due to the waiting time from when the low income individuals apply for the transfer payments versus when they actually receive the money. Lastly, it is also possible that the incentive to work goes down because people can rely on these transfer payments for their main source of income.