According to Statistics Canada, Canada's real GDP per capita is catching up to America's: it went from 82% in 1999 to 92% in 2008. However, according to the IMF, during the same period, it went from 81% to 82% (other international organizations, like the OECD and the World Bank, show similar numbers). What's going on?
The reason why these estimates have come to differ so greatly is that Statistics Canada estimates that the purchasing power of each Canadian dollar was 90 U.S. cents in 2008, while the IMF reckoned that it was only 81 cents. In contrast, in 1999, both agencies pegged the CAD's real value at 0.84 USD. Of course, this begs the questions: why did the difference arise, and who's right?
Statistics Canada gives two reasons for the diverging figures, both of which suggest that its numbers better reflect the relative standing of the Canadian economy:
1. The International Comparison Program (ICP) is the main reference for establishing the true purchasing power of various currencies. It does so by collecting prices for a variety of goods in each participating country. The last round of the ICP was carried out in 2005, and determined that the CAD's purchasing power was about 0.82-0.83 USD. However, Statistics Canada used extra data and recomputed the figure by tweaking the basket of goods being compared, so that it better reflects North American consumption and investment patterns. The adjusted value was 0.87 USD.
2. After the 2005 benchmark, these statistics are adjusted every year to reflect differences in inflation between countries. For example, if inflation is higher in Canada than in the US, then the relative purchasing power of the CAD would decrease. Question: inflation of what? If Canada and the US did not trade at all, the answer would be easy: the inflation of all goods and services in each economy. But due to international trade, the G&S produced in a country do not correspond to the G&S consumed in that country. What basket of goods and services should be used depends on the purpose of the calculations:
- If one is trying to figure out economic (i.e. real GDP) growth for a given country, one should use production prices: the goal here is to compute the change in the volume of G&S produced. The relative prices of imports and exports are held constant.
- If one is instead interested in international comparisons of material quality of life, the consumption prices are the relevant ones. The relative prices of imports and exports follow changes in the market.
In Canada's case, this makes a big difference: as energy prices have risen considerably, a given volume of Canadian exports is now worth more imports than it used to. This has not been the case for the US. Thus, since 2005, while Canada's economic growth per person has roughly matched America's, Canadians' material quality of life has been increasingly more rapidly than Americans'. This is the second reason why international organizations, using the former measure, do not show Canada catching up, while Statistics Canada does.
(By the way, the second measure above - the trade-adjusted value of GDP - is sometimes termed Gross Domestic Income (GDI). Every year, GDP=GDI at that year's prices, by definition: your income is the value of what you produce. But because the previous year's GDP and GDI are not generally the same at current prices, real GDP and real GDI growth rates differ. So point 2 is simply saying that the international organizations' estimates reflect Canada's real GDP growth rather than its real GDI growth.)
To make a long story short: there is good reason to believe Statistics Canada's findings that Canadian economic standards are catching up to American ones (although I'm bit skeptical about the point 1 adjustment being so large)! This is consistent with the mood in the two countries, even during the 2003-2007 expansion: while Canada and the U.S. posted similar growth rates (and had similar population growth rates as well), Canadians were much more upbeat than Americans about the economy. After the next round of the IPC in 2011, international organizations will recognize part of the catch-up (the portion related to point 2), as the exercise will update the relative prices of all goods.
Interesting side note: although Statistics Canada puts the CAD's purchasing power at 0.90 USD, it is lower for private consumption goods and services (what you and I actually "feel") - only 0.84. The numbers vary wildly across categories of goods: food, alcohol and tobacco are a lot more expensive in Canada, while health care (even the private portion, like eye care and dentistry) and education are a lot cheaper. However, for government purchases and capital investments, the values are 1.01 and 0.98. The former reflects cheaper health care in Canada, while the latter may be partially due to Canada mainly using value-added taxes instead of sales taxes.