5.3: Growth in potential output

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Growth in the labour force and improvements in labour productivity increase the economy's potential output over time. Labour productivity grows as a result of advances in technology and knowledge coming from investments in capital equipment, education and training. Figure 5.5 shows estimated growth rates for potential and actual real GDP each year in Canada over the period from 1990 to 2016. Potential GDP grew over this period, reflecting the underlying growth in labour force, the stock of capital, and improved technology. But annual growth rates were not constant and in the period since 2000 have tended to decline. Part of this decline is attributed to lower rates of productivity growth in recent years as compared to earlier periods.

Figure 5.5 Annual Growth in Potential and Actual Real GDP in Canada, 1990–2016

Sources: Statistics Canada, CANSIM Table 380-0064, Office of the Parliamentary Budget Officer, Bank of Canada, Monetary Policy Reports and author's calculations.

Growth rates in actual GDP were more volatile relative to growth rates in potential output. The negative growth rates in 1991 and 2009 mark the recessions of those years. Fluctuations in AD and AS cause business cycles in real GDP and employment. Unemployment rises when output growth is less than the growth in potential output and falls when it is greater.