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I am sure you have heard that Canada’s economy is not doing so well. A quick Google search reveals that the Fraser Institute says so. RBC writes about it. The folks at the Bank of Canada give speeches on the topic. Frankly, there is a very large etcetera to the list of doomsayers that guarantees I will fail to properly credit everyone if I try to be exhaustive.
Is it true, though? Well, let’s think about it through an example.
Imagine you have a factory, inherited from your father in the year 2000. When it was his, your father worked hard, learned how to produce the goods and every year managed to increase production by two per cent. He sold the output for the same price and saw his income grow by that same two per cent every year. As a result, both his output and his disposable income grew at two per cent. Every year he was a bit richer, a bit happier, and a bit more productive.
Then, in 2000, your father bequeathed you the factory. Instead of producing two per cent more every year, you produced the same quantity but kept increasing the price by two per cent every year. As a result, your output has been the same for the last quarter-century, but your disposable income has grown quite a bit. Every year you are a bit richer, a bit happier, but the doomsayers criticize you for not being more productive.
In a nutshell, this is the story of Canada’s recent economic performance.
In the following Figure, I plot Canada’s total factor productivity (TFP) since 1970. As the picture shows, TFP used to grow and — since around the year 2000 — it has been flat throughout.
Figure 1: Loertscher and Pujolas (Canadian Journal of Economics, 2024)
If that is all you got, you’ve got to panic. It is well established that richer countries have higher TFP. As countries develop, their TFP grows. More TFP is associated with greater economic well-being. But the reason why TFP is such a useful metric is because it tends to explain economic well-being. In developed countries such as Canada, we have a second metric that is perhaps more suitable to directly measure economic well-being: net disposable income. Next, I plot its evolution since 1976.
Figure 2: Own calculations using OECD data
This chart clearly indicates that the value of net disposable income of Canadians has been growing despite TFP remaining flat. In light of this, it would be easy to argue that Canadians are better off. Canadians’ living standards certainly increased by more than what the doom-and-gloom figures associated with TFP would suggest.
So, what is going on?
We have some partial answers, but research on the topic is still ongoing. Here is part of the story, linked to the example above: the terms of trade, which measure how expensive imports are compared to exports, have appreciated a lot.
Next, I will plot the price of imports over the price of exports since 1970. If the line goes down, Canadians get more for less (which is good). The picture shows that between 1970 and 2000, prices fluctuated, but stayed relatively constant. Since the early 2000s, however, the terms of trade have appreciated more than 20%.
Figure 3: Own calculations using OECD data
GDP, and hence productivity, is designed to explicitly exclude improvements in terms of trade. When the National Accounts were established, it was decided that GDP figures wouldn't increase, even when foreigners paid more for the same amount. This means that real GDP per capita measures how much is produced in Canada, not how much Canadians can buy.
In a 2019 paper published at the Canadian Journal of Economics that I co-authored with J.C. Conesa, we addressed the discrepancy between production and income caused by the consistent improvement in Canada's terms of trade. We called the measure Real Purchasing Index and I plot it below these lines.
As the Figure shows, compared to 2000, Canadians in the early 2020s can buy eight per cent beyond what real GDP growth figures indicate.
Figure 4: OECD data using Conesa and Pujolas (Canadian Journal of Economics, 2019) formula
So, what has happened? Well, instead of producing increasingly more, Canadians are producing the same, but foreigners are willing to pay more and more for it. Why should this be a bad thing?
Pau S. Pujolas is an associate professor at McMaster University (in Hamilton, ON), where he has taught since 2013. Pujolas’ research has been published in research journals such as the International Economic Review, the Review of Economic Dynamics, the Annual Review of Economics, and the Canadian Journal of Economics.
Comments
Given the current situation with affordability and the so called housing crisis, things are not as bad as they could have been if we ended up with recession. Other countries have not done as well as Canada to avoid a recession and issues that face Canadians today, are not unique or isolated from the rest of the world. In fact, the so called housing crisis is far worse in Australia for example, along with higher mortgage interest rates. Grocery prices are just as bad in many countries and people forget how climate change and environmental impacts are causing low yields or crop failures around the globe, which translates to higher prices.
The trouble is our freedom convoy crowd and other right-wing groups, they have blinders on and can't see the forest for the trees when it comes to the issues they seem to think are unique to Canada and Trudeau. In fact, they are too blind to see what is happing around the globe, and how it is worse in other countries. They are too quick to judge without all the facts and are too busy believing what they see on social media, or social media influencers that spread more disinformation and conspiracy nonsense than tell the truth based on real facts. I find most millennials tend to ignore what is going around the globe, and just rely on the propaganda spewed on social media. I thought that generation was suppose to be smarter than the previous, but it seems we are mistaken.
I don't understand our economy because so much of it is just sales of extraction: extracted wood, carbon, fish.
This depends more on the price of wood, carbon, and fish than it does on our hourly productivity in their extraction.
So the price of oil and gas exploded in 2022, and we were all suffering for it, because we pay "world price" for our own extractions, whatever they actually cost us to extract. But do those sales actually benefit Canadians much? Not the O&G workers, who are paid the same, and who have never recovered their employment numbers from the big loss in 2014.
How much of the investors' profits from our extractions even stays in Canada? When Canadian oil companies pull in an extra billion, does it mostly end up in Wall St, City of London, The Hague?
We have been gaslighted by a Conservative wannabe PM, who tells us Canada is broken, things are worse than bad, and going downhill rapidly. The Fraser Institute, the CD Howe talk of productivity and that it isn't rising. Well, I have been in the work force for 60 years and every year the Right Leaning supposed think tanks, have told me we need better productivity.
Professor Pujolas analysis is excellent.
Listening to other podcasts about inequality, we find huge differences in opinions. We know the rich are getting richer yet Canada is doing much better than most Western Countries by not creating a huge class of poor as is happening in the USA and UK.
The whole objective of today's conservatives is neoliberalism which means create a business owning profit making class and the rest of us become renters of everything. Premier Smith is implementing daily laws, regulations and policies to encourage this. Poilievre as PM has declared the federal government should concentrate on infrastructure and all social programs like senior's pension, research, public health care, daycare, pharma and dental Care should be abolished. Take care of yourself. Harper on steroids.
Thanks to professor P for his enlightening statistics and graphs