3.5: Measuring the Health of the Economy

Every day, we are bombarded with economic news (at least if you watch the business news stations). We are told about things like unemployment, home prices, and consumer confidence trends. As a student learning about business, and later as a business manager, you need to understand the nature of the Canadian economy and the terminology that we use to describe it. You need to have some idea of where the economy is heading, and you need to know something about the government’s role in influencing its direction.

Economic Goals

The world’s economies share three main goals:

• Growth
• High employment
• Price stability

Let us take a closer look at each of these goals, both to find out what they mean and to show how we determine whether or not they’re being met.

Economic Growth

One purpose of an economy is to provide people with goods and services such as cars, computers, video games, houses, rock concerts, fast food, and amusement parks. One way in which economists measure the performance of an economy is by looking at a widely used measure of total output called the gross domestic product (GDP). The GDP is defined as the market value of all goods and services produced by the economy in a given year. The GDP includes only those goods and services produced domestically; goods produced outside the country are excluded. The GDP also includes only those goods and services that are produced for the final user; intermediate products are excluded. For example, the silicon chip that goes into a computer (an intermediate product) would not count directly because it is included when the finished computer is counted. By itself, the GDP doesn’t necessarily tell us much about the direction of the economy. But a change in the GDP does. If the GDP (after adjusting for inflation) goes up, the economy is growing. If it goes down, the economy is contracting. There is some debate amongst economists that GDP provides the most accurate measure of an economy’s performance. Many economists believe that GDP per capita, which is the measure of total production of goods and services divided by the number of households, is a better indicator of an economy’s performance. According to FocusEconomics, in 2025, the top five countries by GDP are: ^[1]

• United States: USD 30.4 trillion
• China: USD 19.6 trillion
• Germany: USD 5.0 trillion
• Japan: USD 4.4 trillion
• India: USD 4.3 trillion

As shown in Figure 3.7, the economic ups and downs resulting from expansion and contraction constitute the business cycle (also referred to as the industry life cycle). Similar to a product lifecycle, as a business cycle introduces new products, those products grow, mature and decline; when all business cycles in an economy are combined, an economy’s business cycle is created. A typical cycle runs from three to five years but could last much longer. Though typically irregular, a cycle can be divided into four general phases of prosperity, recession, depression (which the cycle generally skips), and recovery:

• During prosperity, the economy expands, unemployment is low, incomes rise, and consumers buy more products. Businesses respond by increasing production and offering new and better products.
• Eventually, however, things slow down. GDP decreases, unemployment rises, and because people have less money to spend, business revenues decline. This slowdown in economic activity is called a recession. Economists often say that we are entering a recession when GDP goes down for two consecutive quarters.
• Generally, a recession is followed by a recovery or expansion in which the economy starts growing again.
• If, however, a recession lasts a long time (perhaps a decade or so), while unemployment remains very high and production is severely curtailed, the economy could sink into a depression. While economists have defined recession, they have not agreed on a uniform standard for what constitutes a depression, though they are generally characterized by their duration. Though not impossible, it is unlikely that Canada will experience another severe depression like that of the 1930s. The federal government has a number of economic tools (some of which we’ll discuss shortly) with which to fight any threat of a depression.

High Employment

To keep the economy going strong, people must spend money on goods and services. A reduction in personal expenditures for things like food, clothing, appliances, automobiles, housing, and medical care could severely reduce GDP and weaken the economy. Because most people earn their spending money by working, an important goal of all economies is making jobs available to everyone who wants one. In principle, full employment occurs when everyone who wants to work has a job. In practice, we say that we have full employment when about 95 percent of those wanting to work are employed.

Unemployment

Statistics Canada tracks unemployment and reports the unemployment rate: the percentage of the labour force that is at least 15 years old and that is unemployed and actively seeking work. The unemployment rate is an important measure of economic health. It goes up during recessionary periods because companies are reluctant to hire workers when demand for goods and services is low. Conversely, it goes down when the economy is expanding and there is high demand for products and workers to supply them. There are several different measures of unemployment because there are different reasons people may be unemployed, including:

• Frictional unemployment. Workers move between jobs and locations.
• Structural unemployment. Jobs are terminated.
• Cyclical unemployment. Impacted by the business cycle, when businesses may not have enough demand for labour.
• Seasonal unemployment. Jobs that occur during part of the year (e.g., snow plowing, beach-related industries).

Figure 3.8 shows the Statistics Canada map of the unemployment rate by province and territory as of September 2024. Which province or territory has the highest unemployment rate? Why might that be?

Price Stability

A third major goal of all economies is maintaining price stability. Price stability occurs when the average price for goods and services either does not change or changes very little. Rapidly rising prices are troublesome for both individuals and businesses. For individuals, rising prices mean people have to pay more for the things they need. For businesses, rising prices mean higher costs, and, at least in the short run, businesses might have trouble passing on higher costs to consumers.

Inflation

When the overall price level goes up, we have inflation. More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens to a large number of businesses and sectors, it leads to an increase in inflation.

The inflation rate in Canada averaged 3.02 percent from 1915 until 2025. This means that $100 in 1915 is equivalent in purchasing power to about $2,638.04 today, an increase of $2,538.04 over 110 years. ^[2]

Deflation

When the price level goes down (which rarely happens), we have deflation. A deflationary situation can also be damaging to an economy. When purchasers believe they can expect lower prices in the future, they may defer making purchases, which has the effect of slowing economic growth. Japan experienced a long period of deflation, which contributed to economic stagnation in that country, from which it is only now beginning to recover.

The Consumer Price Index (CPI)

The most widely publicized measure of inflation is the consumer price index (CPI), which is reported monthly by Statistics Canada. The consumer price index (CPI) measures the rate of inflation by determining price changes of a hypothetical basket of goods, such as food, housing, clothing, medical care, appliances, automobiles, and so forth, bought by a typical household.

The Bank of Canada currently measures prices against the base year of 2002, and the basket for that year is given the value of 100. In 2012, the CPI averaged $121, which means that what you could buy for $100 in 2002 cost $121.70 in 2012. The difference registers the effect of inflation. In fact, that’s what an inflation rate is—the percentage change in a price index.

The Bank of Canada created an Inflation Calculator to compare the costs of consumer goods from then to now. For example, ask a parent or an older neighbour what they paid for their first car, first house, or first formal wear. Observe Figure 3.9 showing the consumer price index for the years 2000 to 2024.  Why do you think there is a huge increase in the CPI during 2022?  What happened in the world to cause this?

Media Attributions

“Figure 3.7: The Business Cycle” is adapted from Chapter 3 – Economics and Business in Fundamentals of Business, © Florence Daddey and Rachael Newton, licensed under CC BY-NC-SA.

Figure 3.8: Statistics Canada, unemployment rate by province and territory, September 2024 (Source: Statistics Canada, 2024, November 10, based on Labour Force Survey (3701), tables 14-10-0287-02 and 14-10-0292-02. Reproduced and distributed on an “as is” basis with the permission of Statistics Canada.), © Statistics Canada, licensed under Statistics Canada Open license/All Rights Reserved.

Figure 3.9: Statistics Canada Consumer Price Index from 2000 to 2025. (Source: Statistics Canada, 2025, February 18, based on price trends: 1914 to today. Reproduced and distributed on an “as is” basis with the permission of Statistics Canada.), © Statistics Canada, licensed under Statistics Canada Open license/All Rights Reserved.

Image Descriptions

Figure 3.7

A graph diagram with the horizontal axis “Time,” and the vertical axis “Real GDP per year.” A wavy yellow line represents cyclical economic fluctuations, illustrating phases labelled “Peak,” “Contraction,” “Trough,” and “Expansion,” and “Peak.” These phases are marked by vertical dashed lines. A horizontal arrow on the left between Peak and Trough is labelled “Recession,” and the arrow to the right between Trough and the second Peak is labelled “Recovery,” indicating periods of economic decline and growth. A green upward-sloping line labelled “Growth Trend” intersects the cyclical line, suggesting a long-term positive trend in economic output.

[back to figure]

Figure 3.8

A map of Canada with provincial and territorial borders and a legend. Each province and territory has a yellow callout listing the unemployment rate and percentage point changes in the month of September 2024. A legend at the top right corner explains the colour coding for the unemployment rate and percentage point change.

Note(s): Statistically significant changes denoted with * symbol. Data are seasonally adjusted. Data for the territories are three-month moving averages.
Source(s): Labour Force Survey (3701), tables 14-10-0287-02 and 14-10-0292-02.

[back to figure]

Figure 3.9

A line graph with a vertical axis ranging from -1 to 9, representing the percentage change, and a horizontal axis with the years from 2001 to 2025. The graph illustrates variable trends with peaks and drops, indicating periods of inflation and deflation over the years, trending between 0.5 and 5. In 2009, the line drops down to -1 and goes back to the range in 2010. After a drop just below 0 around 2020, the line has a notable spike up to 8 around 2022 .

[back to figure]