Week 1-6 Summary: Measuring the economy

Here is the markdown conversion of the provided text. # Measuring the economy When you're sick, there's one number that matters: your temperature. Sure, your blood pressure matters, and your breathing rate matters even your shoe size might matter. But there's one number that every doctor is going...

Here is the markdown conversion of the provided text. # Measuring the economy When you're sick, there's one number that matters: your temperature. Sure, your blood pressure matters, and your breathing rate matters even your shoe size might matter. But there's one number that every doctor is going to find out first, and that's your temperature. The same thing is true in economics. There's one number that matters most. It's not the only number, or even the best number, but it is an important number, because (like your temperature) it tells us a lot about the economy. That number is the GDP. That stands for "Gross Domestic Product". The GDP measures how much a country produced in a year. Roughly speaking, if the economy produced more 'gross product' ('gross' meaning here 'overall', not 'disgusting') this year than last year, it's doing well. And if the economy produced less this year than last year, it's doing badly-it's probably in a recession. Like I said, there are other measurements that matter. (The one that matters most to you is probably the unemployment rate.) But to economists, the GDP matters most. What is the GDP of Canada? It's about $2.2$ trillion US dollars (Canada). That's about $3$ trillion Canadian dollars. There you go. That will be on the exam. You'll never need to know it otherwise. We will talk about how we come up with that number later on. ## GDP has been bonkers lately About 4 years ago, we went through a brief and brutal recession one of the worst to have happened in modern industrial history. The whole economy was shuttered as a result of the COVID-19 epidemic. Large parts of the economy came to a total standstill. **Chart 1**. Real gross domestic product grows in April. Billions of chained (2012) dollars all industries. The chart showcases real gross domestic product growth in April, measured in billions of chained (2012) dollars across all industries. The x-axis displays years from Apr-17 to Apr-22, while the y-axis represents the GDP value ranging from 1,600 to 2,100. The data shows a significant drop in GDP around April 2020, followed by a recovery. **Source(s)**: Table 36-10-0434-01. As a result, the GDP see-sawed dramatically. It took a huge dive in March of 2020 and then recovered at first quickly, then slowly (Government Of Canada, 2022). And, miraculously, things returned more or less to normal it was hard on a lot of people, for sure, but the GDP came back very quickly. This was one of the most brutal recessions in history. And a lot of people loved it! We'll talk about this, and some other recessions, in class. ## But enough about the past! What about right now? What will the future be like? In a nutshell: Nobody knows! Lately, inflation was really bad. Then unemployment went up. Parts of the government are trying to slow the economy down, while other parts are trying to speed it up. It's bizarre. (We'll talk more about what 'the government' means later, and what 'the government' does, later.) House prices are insane. Rents are insane. Deficits are insane. The stock market is at a peak. Middle-class wages have stagnated. To me, it all feels just wacky. Bonkers. Out of alignment. But I always like to start this course with a huge step back. Things are weird right now. But things are generally pretty good. Honest. It might not feel like it, but you are rich. Yes, you, you right there, Angela. You are rich. Let's talk about that. Have you ever been to a medieval castle? The kind that the richest dukes and princes lived in? The ones with tapestries and furs, and feasts? Like in Game of Thrones? They suck. Castles are cold! They're damp! They have no plumbing and no lights, let alone good wifi. You right there you are vastly better off than the king of England was 500 years ago. Your home is warm and has wifi. You have toothpaste. No, seriously, you have toothpaste. Colgate invented toothpaste as we know it about 150 years ago. ("Toothpaste.") Can you imagine how much life would have stunk (literally) without it? Toothpaste! The Queen of England would have killed for the King to have toothpaste 500 years ago. Today, you can order a shirt for $29 and have it delivered the next day. I just did! In the middle ages, a typical person might get one or two new shirts a year. A typical shirt may have cost $1000. (How Much Did a Shirt Really Cost in the Middle Ages?, n.d.). You could buy a better one for $25 at Costco today. That is amazing. It's because of something we're going to call "the hockey stick of growth". ### History's hockey stick: Real gross domestic product per capita using the ratio scale, 730 to 2018 **Unit 1** 'The capitalist revolution' Section 1.3 'History's Hockey Stick: Growth in income' in The CORE Team, The Economy. Available at: https://tinyco.re/28126370 [Figure 1.1b] The chart titled "History's Hockey Stick: Real gross domestic product per capita using the ratio scale, 730 to 2018," illustrates changes in real gross domestic product per capita over time for various countries. The x-axis denotes the years from approximately the year 730 to 2018, and the y-axis represents the real GDP per capita. Different colored lines represent countries such as United States, Canada, Japan, United Kingdom, China and India. The data shows relatively flat GDP per capita until around the 18th-19th century, after which there is a steep upward increase, resembling a hockey stick shape. Roughly, speaking, that chart shows you how rich people are today compared to how rich they were for much of human history. In short, around much of the world, we're really rich, and getting richer quickly. ## What led to the 'hockey stick' of growth? For the past 200 years or so, the economy has grown. That's not an abstract thing: you and I can buy more now than we ever could have before. But before around 1800, the earth was 'flat'. Everyone, everywhere, for all of time, had had roughly the same income. And everyone, everywhere, for all time, was poor and had been poor for as long as they could remember. Life sucked. In the past 200 years, we have become astonishingly rich by the standards of almost anyone in all of time. Really! It doesn't always feel like it, but it's true. You want more proof? I'll give it to you in two words: 'video calling'. When I was a kid (and I'm not that old), long distance calls were expensive, and video calling was science fiction. I remember seeing it in the movie Blade Runner and being blown away. Couldn't happen, but wouldn't it be cool? Now video calling is everywhere. It's so common we hate it! How can that be? Science fiction became reality, and then went straight out the other side to become an irritation. That blows me away. When I was 13, I couldn't call Toronto without worrying about the bill. Now I can't video call my friend in Switzerland (for free!) without worrying about bugging him. If you ask me, a number of changes led to this rapid growth: * Democracy and great legal systems * Big, interconnected economies * The use of oil * The discovery of electricity ### Capitalism Capitalism is awesome It's popular to come down heavy on capitalism. I do too! But capitalism properly done is amazing. Let me explain what capitalism is in a perfect world: 1. We all have private property that thieves, crooks, and kings cannot steal 2. We are connect with each other in 'markets' where we can buy and sell things we want and things we made 3. We can organize into companies that allow us to specialize, raise money, protect us from legal liability, and have employees And and this is a big "and", this three part structure is supported by a well-functioning government that is uncorrupt, provides infrastructure, and enforces the law fairly. ## What is GDP per capita? GDP is a dollar measurement of the value of goods and services a country produces in a year. The USA and China have the two highest GDPs in the world but we only think that Americans are rich. Why is that? The USA has a high GDP per capita. The per capita GDP is the average income of people in a country. China has roughly four times the population of America, so though its GDP is in the same range, on average, the people there are poorer in fact, they are about one quarter as rich on average. Roughly speaking, then, GDP tells us how rich a citizen is. Countries with high GDP per capita are nice places to be. Countries with low GDP per capita are harder places to live. ## And finally, GDP isn't perfect GDP is not a perfect measurement. To start with, the GDP does not include many good things, like * Unpaid labor, like stay-at-home parents and home-cooked meals * A good environment * In fact, destruction can even be good for the GDP, because it turns something unpriced into something priced * How much free time we have And GDP per capita tells how much money we make, but it doesn't tell us: * How equally that money is distributed * How much money is left over after taxes * How that money is spent (spending on drugs, drink, or lawyers stinks) Finally, GDP per capita is very odd! You might think that when people get richer, they get happier. To point, this is true. But do you know what makes people really happy? It's not being richer it's being richer than their friends. True! Still, GDP, and GDP per capita are the most important measures of an economy. To compare living standards in each country, we start from a measure called **gross domestic product (GDP)** gross domestic product (GDP) A measure of the total output of goods and services in the economy in a given period. GDP combines in a single number, and with no double counting, all the output (or production) carried out by the firms, non-profit institutions, and government bodies within a government's territory. Household production is part of GDP if it is sold. GDP is measured monthly, quarterly, and annually. GDP is a measure of how much is produced in a particular country in a year. We refer to GDP as the 'output' of a country. Diane Coyle, an economist, says it 'adds up everything from nails to toothbrushes, tractors, shoes, haircuts, management consultancy, street cleaning, yoga teaching, plates, bandages, books, and the millions of other services and products in the economy'.1 These are all added together using their market values, which gives us total output, which also corresponds to the total income of everyone in the country. Then we divide GDP by the total population, and use the resulting number-GDP per capita to measure average income, or 'living standards'. (Some important things have been left out here. We discuss them in the extension of this section.) In Figure 1 the height of each line is an estimate of average living standards at the date on the horizontal axis. You can see, for example, that in the fourteenth century, living standards were higher in Italy than in any of the other countries for which we have data. #### History's hockey stick: Worldwide historical real gross domestic product per capita, 1000 to 2018 **Unit 1** 'The capitalist revolution: prosperity, inequality, and planetary limits' in **The CORE Team**, The Economy 2.0 Microeconomics. Available at: https://tinyco.re/19274920 [Figure 1.1] The chart, titled History's Hockey Stick: Worldwide Historical Real Gross Domestic Product per Capita, 1000 to 2018, presents global economic trends from 1000 AD to 2018. The x-axis shows time, with the y-axis representing real gross domestic product per capita. Different lines correspond to various countries. In early years, GDP is low and relatively flat across all regions. Around 1800, some countries, such as United Kingdom and Italy, start seeing growth while others remain flat. In the 20th century, countries like China and India also begin experiencing growth, showcasing an increasingly unequal distribution of wealth across nations over time. By 2018, according to this measure, people were six times better off, on average, in Japan than in India. People in Japan were nearly as rich as those in Britain, just as they were in the fourteenth century, but people in the US (not shown) were even better off, and people in Norway (also not shown) are better off still. Before 1300, we have very few data points. For example, we have estimates of Chinese GDP only in 1000, 1090, and 1120, so the graph is drawn by joining these points with straight lines. We can draw the graph in **Figure 1.1** because of the work of Angus Maddison, who dedicated his working life to finding the scarce data needed to make useful comparisons of how people lived across more than 1,000 years. More recent estimates by economic historians are shown in the figure. This book will show you that the starting point of all economics is data like this about regions of the world, and the people in it. History's hockey stick does not appear in all countries and, where it does, it is shaped differently for different countries. The hockey stick kink is less abrupt in Britain, where growth began around 1650, while in Japan the kink is sharper, occurring around 1870. In China and India, living standards declined during the period when growth was taking off for countries in western Europe, and the kinks happened much later in the second half of the twentieth century. In some economies, including those of China and India, substantial improvements in people's living standards did not occur before they gained independence from colonial rule or interference by European nations. * India: GDP per capita fell by one-third between 1600 and 1870, as India increasingly came under British colonial rule. * China: China suffered a similar decline in the eighteenth and nineteenth centuries, when European nations dominated its politics and economics. It had once been richer than Britain but, by the middle of the twentieth century, GDP per capita in China was one-fourteenth that of Britain. * Latin America: Neither Spanish colonial rule, nor its aftermath following the independence of most Latin American nations early in the nineteenth century, saw anything resembling the hockey stick upturn in living standards experienced by the countries in Figure 1.1. * Nigeria: Nigeria illustrates a case (one of many) in which there was little if any growth in output per capita prior to independence from colonial rule in 1960, and limited growth thereafter. Figure 1 also illustrates that for much of history, living standards did not grow in any sustained way. When sustained growth occurred, it began at different times in different countries, leading to vast differences in living standards between countries around the world. Since late in the twentieth century, 'latecomers' such as India and China have been catching up with the richer nations, but in some countries the hockey stick has not yet tipped upwards. An entertaining video by Hans Rosling, a statistician, shows how some countries got richer and healthier much earlier than others. Understanding why over the past three centuries some countries have prospered and others have not has been one of the most important questions that economists have asked. Last week, I said that COVID 19 lead to a recession. That recession, in turn, led to the brutal inflation we've faced in the past year or so. Let's talk a little about recessions today. We'll talk about inflation in the coming weeks. The two biggest previous economic catastrophes were the global financial crisis (also known as the Great Recession) and the Great Depression. The global financial crisis started in 2007. It didn't affect Canada nearly as badly as it did the USA, but there it was bad. The Great Depression happened in 1929, and it was the worst economic catastrophe in modern history. The COVID recession was bad, but quick (and expensive) government action prevented the worst effects and enabled a quick recovery. Unfortunately, those quick (and expensive) government actions led to inflation. ### What made the COVID recession terrible? The American unemployment rate before the crisis hit was about 4%. It was at record lows across North America; in Canada it was 5.4% as low as it had been in recent history. Typically, the unemployment rate is about 7%. (Canada Unemployment Rate 1991-2022, n.d.). 2020 was not like that. The unemployment rate hit 14% in March, 2020. As I write this, it's 6.8%, which is up a bit from where things were. Figure 1. Source: Government Of Canada, "Unemployment Rate Rises from 5.0% to 5.5% in Three Months." That's amazing. It's even more amazing that we had such quick recovery after such a serious recession. It's incredible. Let's talk about the flip side of this: unemployment If you, for instance, don't have a job because you're studying, you're not unemployed. You just don't have a job. To be unemployed, you have to not have a job and want a job. Many people who don't have jobs for a while give up. They become 'discouraged workers'. Some retire, some collect social welfare benefits, and a few truly suffer. But if they give up looking for work, they're not unemployed either. Strange, but true! Like I said, to be unemployed, you have to not have a job and want to have a job. If you're not looking for work, you're not technically unemployed. So, we have some people giving up, some people retiring, some people collecting benefits, and then another group: people going back to school. All of those people are not unemployed. They are out of the labor force. The image shows a diagram illustrating the composition of the labor market. It starts with a large "Population" pointing to "Population of working age". From there, the population of working age splits into "Labour force" and "Out of labour force (inactive)". The "Labour force" is further divided into "Employed" and "Unemployed". The diagram illustrates how a population is categorized based employment status. **Figure 2**: Source: 9. The Labour Market, n.d. If you ask me, recessions are bad because they lead to unemployment. Think about this for a second. Would you take Friday afternoons off if you got a 10% pay cut? Maybe you would, and maybe you wouldn't, but you'd probably think about it for a while. So you'd maybe be okay with working 90% as hard for 90% of the money. That's not what happens in a recession. 90% of us work 100% as hard and 10% of us get fired. If you think about it, it's insane! And study after study shows that long-term unemployment leads to all sorts of problems, even death: _"Unemployment is a risk factor for physical and mental illness and mortality. Mechanisms linking unemployment to ill health include financial stress; loss of self-esteem, social status and interpersonal contact; and increases in health risk behaviors."_ ("Long-Term Unemployment.") We calculate the unemployment rate (UER) by dividing the unemployed by the labour force. $unemployment \space rate = \frac{unemployed}{labour \space force}$ I know that math kills reading. I get that! But this really matters. Bonus marks if you can see why. It matters because people who are really fed up leave the labour force and so they aren't counted in the unemployment rate, and almost no popular media reports on any other measurement of unemployment. So, if things get really bad, the unemployment rate can go down, even as people are giving up on the prospect of ever finding work. ### Recession or depression? The COVID recession was bad, but not as bad as it could have been. It wasn't a depression. Recessions are usually defined as "two consecutive quarters of economic contraction" roughly speaking, 6 months or more of economic contraction. There's no definition of a depression. We've really only ever had one, the Great Depression, nearly 100 years ago. What caused these? The Great Depression was caused by a stock market crash and a drought. The financial crisis of 2007 was caused by banks collapsing after housing prices collapsed. In both cases, the causes spread outwards across the whole economy. Many people lost their jobs not just those people in farming, finance and housing. The most recent recession, obviously, was caused by COVID-19. But it's a bit more complicated. The government ordered businesses to shut, and paid many business and people to, essentially, wait until the crisis passed. Have you seen Star Wars? It was a bit like when Han Solo got frozen in carbonite: We were all told (and paid) to just freeze and see what happened next. This was hugely controversial, and it was astonishingly expensive. But, in my opinion, it worked. The government flash-froze the economy, and, amazingly, people were able to thaw out and get back to work roughly where they left off (with a few exceptions). Was it perfect? No, far from it. But it turned what could have been a U-shaped recession into a V-shaped recession. A U-shaped is one where a sharp decline is followed by a longer period of bumping along the bottom until the economy recovers. A V-shaped recession is much better: the sharp downturn is followed by a quick recovery. So, that's good! Kind of. Of course, many people suffered. Many people lost their jobs. But, all in all, the government did what it was supposed to and prevented the worst outcomes. We'll talk about the government's programs in more detail over the coming weeks. But while the government programs saved many jobs, they had medium-term effects, including the brutal inflation that was their echo. #### What about those who said that there weren't enough workers? Right after the COVID recession, a lot of employers complained about labour shortages. We're going to learn a lot about shortages later on, but I'll give you the economics to this little problem now. There's no such thing. Think about it: if a bakery offered $200 an hour to its staff, doctors and lawyers would quit doctoring and lawyering and take up cashiering. So, somewhere between $17.25 and $200.00, there's a wage that will fill all those positions. What's the wage? I couldn't say but I know there is one. I'd give the bakery a tip, too, if they asked: they probably should pay more because though I'm super kind (really!) to staff, I didn't buy anything. The line was too long. There's a good chance I wasn't the only one to leave. So, at some point, another staff person would end up paying for herself as more people stuck around and bought stuff. Paying higher salaries can be good business. The end of the COVID recession was, indeed, quite good for some workers: for single people, it jumped 7.6%. ("Income at a Glance") This chapter comes from **Principles of Macroeconomics 2e** ## Who's In or Out of the Labour Force? Should we count everyone without a job as unemployed? Of course not. For example, we should not count children as unemployed. Surely, we should not count the retired as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave. Economists do not just divide the adult population into employed and unemployed. A third group exists: people who do not have a job, and for some reason (retirement, looking after children, taking a voluntary break before a new job) are not interested in having a job, either. This group also includes those who do want a job but have quit looking, often due to discouragement due to their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labour force. To be classified as unemployed, a person must be: 1. Without a job, 2. Currently available to work, 3. Actively looking for work. Thus, a person who does not have a job but who is not currently available to work (or has not actively looked for work in the last four weeks) is counted as out of the labour force. The three kinds of worker are: * 1) Employed: currently working for pay * 2) Unemployed: Out of work and actively looking for a job * 3) Out of the labour force: Out of paid work and not actively looking for a job The sum of 1 and 2 is the labour force. The image is a pie chart titled "The Three-Way Division of the 16-and-over population." The chart segments total population into three categories: "Out of labor force," represented in brown/red color, which accounts for 94,366 thousand. The "Employed" population in the United States is represented in green color and accounts for 152,081 thousand. Finally, the "Unemployed" population is represented in light-brown color and accounts for 7,635 thousand. The pie chart shows the three-way division of the 16-and-over population. In January 2017, about 62.9% of the American adult population was "in the labour force"-either employed or looking for work. The unemployment rate is not the percentage of the total adult population without jobs, but rather the percentage of adults who are in the labour force but who do not have jobs. In this example, the unemployment rate is: $\frac{7,635}{(152,081+7,635)}=4.8$% Canada has a slightly higher labour force participation rate about 65%.) Canada Labor Force Participation Rate, n.d.) Our unemployment rate is typically a percent or two higher than the American rate, however. In 2022, it reached a record low of around 4.9%. (Government of Canada, 2022). It has since increased to about 5.5%. (Government Of Canada, 2023) ### Hidden Unemployment Even with the "out of the labour force" category, there are still some people who are mislabeled in the categorization of employed, unemployed, or out of the labour force. There are some people who have only part-time or temporary jobs, but are looking for full time and/or permanent employment. They are counted as employed, although they are not employed in the way they would like or need to be. They are **underemployed**. There are more individuals who are underemployed, including those who are trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in finance who is working as a sales clerk underemployed. They are, however, also counted in the employed group. All of these individuals fall under the umbrella of the term "hidden unemployment." Discouraged workers, those who have stopped looking for employment and, hence, are no longer counted in the unemployed also fall into this group. "Underemployment" is a measure of how well the job market is working. A high number of underemployed people is bad-they are not working as much or as well as they could be. The number of underemployed is the number of people working less than they would like plus the number of overqualifed workers. "Hidden unemployment" adds in the people who are discouraged workers and have given up looking for jobs. The number of the hidden unemployed, then is larger than the underemployed because it includes the underemployed. Underemployed = (Involuntary part time) + (Overqualified) Hidden = Underemployed + Discouraged Criticisms of Measuring Unemployment There are always complications in measuring the number of unemployed. For example, what about people who do not have jobs and would be available to work, but are discouraged by the lack of available jobs in their area and stopped looking? Such people, and their families, may be suffering the pains of unemployment. However, the survey counts them as out of the labor force because they are not actively looking for work. Other people may tell the Census Bureau that they are ready to work and looking for a job but, truly, they are not that eager to work and are not looking very hard at all. They are counted as unemployed, although they might more accurately be classified as out of the labour force. Still other people may have a job, perhaps doing something like yard work, child care, or cleaning houses, but are not reporting the income earned to the tax authorities. They may report being unemployed, when they actually are working. What is a recession? The definition is contested and political **Aug 12th 2022** Wikipedia EDITORS cannot agree on the definition of "recession". Last month the site barred new and unregistered users from editing its page on the subject, after a fierce dispute over the claim that two consecutive quarters of falling GDP indicates a recession. The page, which had previously been tweaked just 24 times in 2022, was edited 180 times in a week. Nor is the debate confined to interested amateurs. In America it has been the subject of political sparring. On August 12th Britain's Office for National Statistics announced that the country's economy had shrunk in the second quarter of the year; economic forecasters think further declines lie ahead. So what constitutes a recession? In short, a period of significant decline in economic activity. A recession typically leads to drops in output and investment, falling profits for businesses and rising unemployment. The global financial crisis of 2007-09 shaved almost 4% off economic growth worldwide. In some countries, including Britain, France and Germany, the convention is that two quarters of negative GDP growth indicates a recession. But many economists believe this definition is too narrow. Japan's cabinet office uses multiple indicators, including factory output, retail sales and employment. America's government has ceded the authority to declare a recession entirely. It defers to the National Bureau of Economic Research (NBER), a private, nonprofit research group. A panel of eight NBER economists known as the Business Cycle Dating Committee (BCDC)- has been America's arbiter of recessions since 1978. As in Japan, the committee defines a recession using a range of factors, including employment, personal income and industrial production. Considering GDP alone, says one former member, is akin to diagnosing a patient's illness only by checking their temperature. This is one reason why America is not officially in a recession, despite its GDP falling in the first and second quarters of the year. Unemployment is low and job growth robust: the country added 528,000 jobs in July, more than twice as many as expected. It has now recovered all those lost during the pandemic. Another reason is that the committee does not make real-time judgments, much less predictions. It prefers to be retrospective, thereby avoiding the possibility of error. (In 2013, for instance, it became apparent that Britain had not in fact gone into recession the previous year, after GDP figures for 2012 were revised.) The BCDC usually flags a recession once it is well under way and sometimes after it is over. The pandemic-induced downturn in 2020 lasted from February to April, according to an official pronouncement made in June that year. The usual lag between the start of a recession and the committee's announcement is almost 12 months. The BCDC concluded in December 2008 that the recession in America caused by the global financial crisis had begun in December the previous year. The NBER may be inclined to wait before making an official pronouncement. But its cautious approach seems to hold little sway with Americans. In a survey conducted by CNN last month 64% of respondents reckoned a recession had already begun. (In June 73% of Britons responding to an Ipsos poll thought the same.) Republicans lambast Democrats for causing a downturn and warn they will pay the price in mid-term elections on November 8th. Democrats maintain that no such recession exists. They may be technically correct-but have good political reason to be defensive too. In Two weeks ago, I said that there is one measurement that every economist pays attention to, just like every doctor pays attention to a patient's temperature. That number is the GDP: the measure of all the goods and services produced in a country in a year, and (when it's expressed per capita) an indication of whether the citizens are getting richer (or poorer). The GDP isn't perfect, but it's close enough for most purposes, as we discussed. I'm not a doctor, but I can tell when a patient has a temperature of 21 degrees that we have a problem (the normal body temperature is 37). In 2020, the Canadian economy was so hypothermic that it was practically frozen. GDP fell by about 25%, a number that would have been impossible to imagine (Parkinson, 2020). It's since rebounded, thank goodness! This was also a very unusual economic crisis because it was caused intentionally. Of course, there have been severe recessions before, like we talked about last week. But as far as I know, all of them were accidental and caused by financial contagion. This recession was intentional and caused by a real contagion. **What is a recession?** A 'recession' doesn't have a technical definition, but a useful one is "two consecutive quarters of economic contraction". (A quarter is a 3-month period.) How do we measure economic contraction? With the GDP. The GDP has four components, and each is measured by Statistics Canada. They are * Consumption * Investment * Government expenditures * Net exports Very roughly speaking, these cover four areas of the economy: * Consumers * Businesses * Governments * Foreigners (It's more complicated, but this is the "The LYSK" section".) A recession must, by definition, be caused by a reduction in one or more of CIGX. * Consumption is the largest component by far, at (roughly) 60%. * Investment is about 15% * Government expenditures are about 25% And net exports are about 0%. This may seem puzzling (surely we export!) but it is very simple. Net exports measures the difference between imports and exports. The pie chart illustrates the components of a GDP, including Government at 25%, Investment at 15%, and Consumption at 60%. The COVID recession saw a huge decrease in consumption and investment. Many workers were told to stay home. Many businesses had to close. But the government spent a lot of money. We'll talk about this next week, but it was exactly the right thing to do. ## Inflation You might wonder about how economists measure the economy since a dollar now buys much less than it did 20 years ago. You may remember from when you were a kid and a bag of chips was bigger and cost less. Now chips seem like a rip off. You might wonder about how economists measure the economy since a dollar now buys much less than it did 20 years ago. You may remember from when you were a kid and a bag of chips was bigger and cost less. Now chips seem like a rip off. Economists know about this, and they have a way to measure it. It's called the CPI: the Consumer Price Index. It's the most low-tech way you could imagine to measure the economy. A government employee buys stuff. They compare the price of the stuff they bought this year to the price of the same stuff last year. If it costs $105 this year, but cost $100 last year, inflation has been 5%. Typically, inflation is about 2%. Inflation, as you probably know, has been very high lately. It's come down lately to about 3%, but things are still working themselves out. ### What about hyperinflation? Inflation is when prices rise. Hyperinflation is when prices rise an