Economic Insights
A Historical Perspective on Recent Movements in Canada’s Purchasing Power Parity

by Ryan Macdonald and Luke Rispoli
Economic Analysis Division

Release date: December 22, 2016

Start of text box

This Economic Insights article presents quarterly estimates from Statistics Canada for the U.S.–Canada purchasing power parity. Similar to earlier articles that examined differences in price levels between Canada and the United States, this short article shows that the relative price level between Canada and the United States does not adjust as much as the exchange rate in the short-run, but that over longer periods of time they move similarly.

End of text box

Introduction

The U.S.–Canada purchasing power parity (PPP) is a measure of the relative price level between Canada and the United States. It measures the difference, in dollars, that exists between the two countries for an individual or firm wishing to purchase an equivalent basket of goods and services in each country. In the third quarter (Q3) of 2016, the U.S.–Canada PPP was US$0.84, meaning that for every dollar Canadians spent on goods and services, Americans spent 84 cents to buy comparable items.

The PPP is often interpreted as an equilibrium, or a long-run, exchange rate.Note 1 But, rather than being based on the prices paid in exchange-rate markets, it is calculated by aggregating the prices paid for traded and non-traded goods and services.Note 2 PPPs are not subject to the same short-run effects as market exchange rates, and the presence of non-traded goods and services means that not all goods and services used in the construction of PPPs are subject to arbitrage forces.Note 3 Nevertheless, they are viewed as more suitable for assessing the relative price level between two nations at a given point in time than market exchange rates due to their relative stability. Consequently, PPPs are primarily used to convert national price levels when making international comparisons. They move similarly to exchange rates over long periods of time, but do not exhibit the same short-run volatility.

Long-run movements in purchasing power parity and the exchange rate

Since the early 1970s, when Canada and the United States introduced floating exchange rates, the U.S.–Canada PPP and the U.S.–Canada exchange rate have moved in a broadly similar direction, but the market exchange rate exhibited more variation (Chart 1). The PPP and the exchange rate experienced a long decline or depreciation during the 1970s and 1980s. The PPP was stable in the 1990s, as the Canadian dollar continued to depreciate. In the 2000s, the PPP rose while the Canadian dollar appreciated, and both showed downward adjustments around the onset of the global economic recession. After the recession, the Canadian dollar subsequently appreciated, only to depreciate sharply beginning around 2013. The PPP, however, was stable until 2014 and declined modestly thereafter.

The larger fluctuations in the exchange rate over the last 40 years means that the two conversion rates were equal in the middle of the 1970s, in the early 1990s and at several points since 2000. However, in the intervening periods, the exchange rate often differed significantly from the PPP as it responded to short-run phenomena such as interest rate changes, or to changes in commodity prices that had stronger effects on currency markets than on domestic price levels.

Recent movements in relative prices

Over the resource cycle of the last 15 years, the exchange rate reached a low of US$0.63 in 2002 Q1, after which the Canadian dollar began a multi-year appreciation. In 2007 Q4, the U.S.–Canada exchange rate averaged US$1.02, and, following a rapid depreciation and appreciation brought about by global economic recession and recovery dynamics, the value of the Canadian dollar recovered to an average of US$1.03 in 2011 Q2. The value of the dollar began to decline in 2011 Q2, slowly at first, then rapidly after 2012 Q4. By 2016 Q3, the U.S.–Canada exchange rate had returned to US$0.77, a level similar to that in 2004.

The PPP also increased between 2002 and 2007, with the most rapid gains occurring between 2002 Q4 and 2006 Q1. The U.S.–Canada PPP remained roughly stable around 2006 Q1 levels until the onset of the global recession in 2007 Q4. Between 2007 Q4 and 2009 Q1, the U.S.–Canada PPP declined from US$0.866 per Canadian dollar to US$0.846 per Canadian dollar. Despite a rebound in the market exchange rate, the PPP remained stable at around US$0.848 until 2014. During this period, the market exchange rate was greater than US$1.00 per Canadian dollar in a number of quarters. Finally, beginning in 2014 Q2 through to 2016 Q1, the U.S.–Canada PPP declined. This coincided with part, but not all, of the period during which the Canadian dollar depreciated. As of 2016 Q3, similar to the exchange rate, the PPP had returned to a level similar to that in 2004.

Chart 1

Description for Chart 1
Data table for Chart 1
Table summary
This table displays the results of Data table for Chart 1. The information is grouped by Year and quarter (appearing as row headers), U.S.–Canada PPP and U.S.–Canada market exchange rate , calculated using US$ per CAN$ units of measure (appearing as column headers).
Year and quarter U.S.–Canada PPP U.S.–Canada market exchange rate
US$ per CAN$
1970 Q1 1.054 0.932
1970 Q2 1.060 0.942
1970 Q3 1.061 0.977
1970 Q4 1.069 0.981
1971 Q1 1.072 0.992
1971 Q2 1.067 0.988
1971 Q3 1.069 0.984
1971 Q4 1.065 0.998
1972 Q1 1.068 0.997
1972 Q2 1.062 1.012
1972 Q3 1.051 1.017
1972 Q4 1.047 1.011
1973 Q1 1.043 1.003
1973 Q2 1.038 1.000
1973 Q3 1.029 0.996
1973 Q4 1.022 1.000
1974 Q1 1.017 1.020
1974 Q2 1.008 1.036
1974 Q3 0.999 1.020
1974 Q4 0.997 1.014
1975 Q1 0.996 1.001
1975 Q2 0.988 0.979
1975 Q3 0.974 0.970
1975 Q4 0.970 0.983
1976 Q1 0.962 1.005
1976 Q2 0.948 1.021
1976 Q3 0.954 1.023
1976 Q4 0.945 1.008
1977 Q1 0.945 0.971
1977 Q2 0.943 0.950
1977 Q3 0.939 0.935
1977 Q4 0.941 0.908
1978 Q1 0.938 0.898
1978 Q2 0.939 0.887
1978 Q3 0.935 0.874
1978 Q4 0.931 0.849
1979 Q1 0.929 0.843
1979 Q2 0.932 0.864
1979 Q3 0.935 0.857
1979 Q4 0.938 0.851
1980 Q1 0.940 0.859
1980 Q2 0.938 0.855
1980 Q3 0.935 0.863
1980 Q4 0.932 0.845
1981 Q1 0.925 0.838
1981 Q2 0.922 0.834
1981 Q3 0.913 0.825
1981 Q4 0.918 0.839
1982 Q1 0.898 0.827
1982 Q2 0.889 0.803
1982 Q3 0.886 0.800
1982 Q4 0.880 0.812
1983 Q1 0.879 0.815
1983 Q2 0.875 0.812
1983 Q3 0.866 0.811
1983 Q4 0.863 0.807
1984 Q1 0.866 0.797
1984 Q2 0.869 0.774
1984 Q3 0.865 0.761
1984 Q4 0.862 0.758
1985 Q1 0.865 0.739
1985 Q2 0.859 0.730
1985 Q3 0.859 0.735
1985 Q4 0.860 0.725
1986 Q1 0.852 0.712
1986 Q2 0.849 0.722
1986 Q3 0.844 0.722
1986 Q4 0.838 0.722
1987 Q1 0.839 0.747
1987 Q2 0.836 0.750
1987 Q3 0.837 0.756
1987 Q4 0.836 0.763
1988 Q1 0.834 0.789
1988 Q2 0.836 0.813
1988 Q3 0.835 0.820
1988 Q4 0.832 0.829
1989 Q1 0.837 0.839
1989 Q2 0.832 0.838
1989 Q3 0.829 0.846
1989 Q4 0.829 0.856
1990 Q1 0.831 0.846
1990 Q2 0.832 0.854
1990 Q3 0.837 0.867
1990 Q4 0.843 0.861
1991 Q1 0.846 0.865
1991 Q2 0.844 0.870
1991 Q3 0.843 0.874
1991 Q4 0.842 0.881
1992 Q1 0.833 0.849
1992 Q2 0.826 0.837
1992 Q3 0.823 0.832
1992 Q4 0.823 0.792
1993 Q1 0.830 0.793
1993 Q2 0.833 0.787
1993 Q3 0.835 0.767
1993 Q4 0.835 0.755
1994 Q1 0.838 0.746
1994 Q2 0.839 0.723
1994 Q3 0.839 0.729
1994 Q4 0.840 0.731
1995 Q1 0.840 0.711
1995 Q2 0.841 0.729
1995 Q3 0.840 0.738
1995 Q4 0.835 0.737
1996 Q1 0.830 0.730
1996 Q2 0.824 0.733
1996 Q3 0.822 0.730
1996 Q4 0.824 0.741
1997 Q1 0.826 0.736
1997 Q2 0.825 0.721
1997 Q3 0.825 0.722
1997 Q4 0.824 0.710
1998 Q1 0.821 0.699
1998 Q2 0.822 0.691
1998 Q3 0.824 0.660
1998 Q4 0.825 0.648
1999 Q1 0.829 0.662
1999 Q2 0.833 0.679
1999 Q3 0.832 0.673
1999 Q4 0.835 0.679
2000 Q1 0.835 0.688
2000 Q2 0.827 0.676
2000 Q3 0.827 0.675
2000 Q4 0.827 0.655
2001 Q1 0.830 0.655
2001 Q2 0.826 0.649
2001 Q3 0.827 0.647
2001 Q4 0.825 0.633
2002 Q1 0.825 0.627
2002 Q2 0.823 0.643
2002 Q3 0.821 0.640
2002 Q4 0.819 0.637
2003 Q1 0.826 0.662
2003 Q2 0.829 0.715
2003 Q3 0.829 0.725
2003 Q4 0.832 0.760
2004 Q1 0.838 0.759
2004 Q2 0.837 0.736
2004 Q3 0.843 0.765
2004 Q4 0.849 0.819
2005 Q1 0.852 0.815
2005 Q2 0.853 0.804
2005 Q3 0.860 0.832
2005 Q4 0.866 0.852
2006 Q1 0.866 0.866
2006 Q2 0.863 0.891
2006 Q3 0.861 0.892
2006 Q4 0.858 0.878
2007 Q1 0.858 0.854
2007 Q2 0.857 0.911
2007 Q3 0.860 0.957
2007 Q4 0.866 1.019
2008 Q1 0.867 0.996
2008 Q2 0.865 0.990
2008 Q3 0.863 0.960
2008 Q4 0.850 0.825
2009 Q1 0.846 0.803
2009 Q2 0.846 0.857
2009 Q3 0.848 0.911
2009 Q4 0.848 0.947
2010 Q1 0.849 0.961
2010 Q2 0.847 0.973
2010 Q3 0.846 0.962
2010 Q4 0.847 0.987
2011 Q1 0.847 1.014
2011 Q2 0.848 1.033
2011 Q3 0.847 1.020
2011 Q4 0.845 0.977
2012 Q1 0.849 0.999
2012 Q2 0.847 0.990
2012 Q3 0.849 1.005
2012 Q4 0.851 1.009
2013 Q1 0.847 0.991
2013 Q2 0.847 0.977
2013 Q3 0.847 0.963
2013 Q4 0.851 0.953
2014 Q1 0.851 0.906
2014 Q2 0.850 0.917
2014 Q3 0.849 0.918
2014 Q4 0.849 0.881
2015 Q1 0.845 0.806
2015 Q2 0.845 0.813
2015 Q3 0.841 0.764
2015 Q4 0.840 0.749
2016 Q1 0.835 0.727
2016 Q2 0.841 0.776
2016 Q3 0.841 0.766

Goods prices versus services prices

The PPP is calculated using a wide variety of prices for consumption and investment goods and services. It aggregates many different prices to measure differences in the overall relative price level. In general, one would expect that for more easily traded items, such as cars or fruit, the price in Canada would be broadly equal to the price in the United States multiplied by the market exchange rate. This hypothesis is known as the law of one price, and it is one theory for how prices in Canada should relate to those in the United States.

In practice, the law of one price rarely holds. Differences in market structure, the presence of trade barriers and transport costs all lead to situations where the law of one price fails.Note 4 Moreover, Canadians and Americans purchase thousands of items, not all of which are traded. For these types of goods or services, it is not clear that the law of one price would, or should, apply.

Since PPPs are composed of many types of products, they can be disaggregated into particular groups to provide a sense of the potential importance of different product types for understanding movements in the overall PPP. One such disaggregation splits products into goods and services. Broadly speaking, the items that are most likely to be subject to the law of one price are goods, and the items that are most likely to be immune to this law are services.

When the U.S.–Canada PPP for goods is compared with the U.S.–Canada PPP for services, the former exhibits a stronger, albeit imperfect, correlation with the nominal exchange rate (Chart 2).

Chart 2

Description for Chart 2
Data table for Chart 2
Table summary
This table displays the results of Data table for Chart 2. The information is grouped by Year and quarter (appearing as row headers), U.S.–Canada goods PPP , U.S.–Canada services PPP and U.S.–Canada exchange rate , calculated using US$ per CAN$ units of measure (appearing as column headers).
Year and quarter U.S.–Canada goods PPP U.S.–Canada services PPP U.S.–Canada exchange rate
US$ per CAN$
1970 Q1 0.989 1.163 0.932
1970 Q2 0.996 1.167 0.942
1970 Q3 1.000 1.163 0.977
1970 Q4 1.006 1.171 0.981
1971 Q1 1.011 1.174 0.992
1971 Q2 1.009 1.164 0.988
1971 Q3 1.004 1.174 0.984
1971 Q4 1.000 1.167 0.998
1972 Q1 1.002 1.169 0.997
1972 Q2 0.995 1.162 1.012
1972 Q3 0.985 1.150 1.017
1972 Q4 0.986 1.138 1.011
1973 Q1 0.983 1.132 1.003
1973 Q2 0.973 1.136 1.000
1973 Q3 0.966 1.126 0.996
1973 Q4 0.956 1.124 1.000
1974 Q1 0.959 1.110 1.020
1974 Q2 0.950 1.105 1.036
1974 Q3 0.953 1.078 1.020
1974 Q4 0.956 1.070 1.014
1975 Q1 0.960 1.063 1.001
1975 Q2 0.953 1.053 0.979
1975 Q3 0.946 1.030 0.970
1975 Q4 0.939 1.032 0.983
1976 Q1 0.932 1.017 1.005
1976 Q2 0.933 0.985 1.021
1976 Q3 0.936 0.994 1.023
1976 Q4 0.937 0.972 1.008
1977 Q1 0.935 0.974 0.971
1977 Q2 0.932 0.974 0.950
1977 Q3 0.931 0.967 0.935
1977 Q4 0.930 0.972 0.908
1978 Q1 0.930 0.967 0.898
1978 Q2 0.932 0.967 0.887
1978 Q3 0.928 0.963 0.874
1978 Q4 0.925 0.956 0.849
1979 Q1 0.924 0.952 0.843
1979 Q2 0.928 0.957 0.864
1979 Q3 0.932 0.958 0.857
1979 Q4 0.931 0.965 0.851
1980 Q1 0.937 0.964 0.859
1980 Q2 0.935 0.962 0.855
1980 Q3 0.928 0.962 0.863
1980 Q4 0.918 0.966 0.845
1981 Q1 0.911 0.963 0.838
1981 Q2 0.902 0.954 0.834
1981 Q3 0.889 0.944 0.825
1981 Q4 0.885 0.946 0.839
1982 Q1 0.875 0.934 0.827
1982 Q2 0.863 0.922 0.803
1982 Q3 0.858 0.914 0.800
1982 Q4 0.851 0.906 0.812
1983 Q1 0.846 0.908 0.815
1983 Q2 0.843 0.903 0.812
1983 Q3 0.835 0.903 0.811
1983 Q4 0.831 0.899 0.807
1984 Q1 0.825 0.903 0.797
1984 Q2 0.825 0.906 0.774
1984 Q3 0.821 0.906 0.761
1984 Q4 0.816 0.909 0.758
1985 Q1 0.812 0.910 0.739
1985 Q2 0.810 0.907 0.730
1985 Q3 0.805 0.910 0.735
1985 Q4 0.805 0.912 0.725
1986 Q1 0.796 0.907 0.712
1986 Q2 0.787 0.905 0.722
1986 Q3 0.785 0.898 0.722
1986 Q4 0.778 0.894 0.722
1987 Q1 0.779 0.888 0.747
1987 Q2 0.777 0.887 0.750
1987 Q3 0.776 0.891 0.756
1987 Q4 0.774 0.891 0.763
1988 Q1 0.771 0.891 0.789
1988 Q2 0.770 0.894 0.813
1988 Q3 0.771 0.892 0.820
1988 Q4 0.767 0.889 0.829
1989 Q1 0.766 0.895 0.839
1989 Q2 0.767 0.886 0.838
1989 Q3 0.761 0.887 0.846
1989 Q4 0.762 0.886 0.856
1990 Q1 0.764 0.888 0.846
1990 Q2 0.768 0.883 0.854
1990 Q3 0.781 0.881 0.867
1990 Q4 0.796 0.880 0.861
1991 Q1 0.808 0.869 0.865
1991 Q2 0.808 0.868 0.870
1991 Q3 0.805 0.867 0.874
1991 Q4 0.803 0.871 0.881
1992 Q1 0.782 0.871 0.849
1992 Q2 0.767 0.874 0.837
1992 Q3 0.762 0.872 0.832
1992 Q4 0.761 0.875 0.792
1993 Q1 0.764 0.880 0.793
1993 Q2 0.770 0.881 0.787
1993 Q3 0.772 0.881 0.767
1993 Q4 0.775 0.878 0.755
1994 Q1 0.779 0.881 0.746
1994 Q2 0.785 0.879 0.723
1994 Q3 0.789 0.880 0.729
1994 Q4 0.791 0.880 0.731
1995 Q1 0.789 0.884 0.711
1995 Q2 0.787 0.888 0.729
1995 Q3 0.785 0.890 0.738
1995 Q4 0.775 0.891 0.737
1996 Q1 0.766 0.892 0.730
1996 Q2 0.752 0.891 0.733
1996 Q3 0.748 0.893 0.730
1996 Q4 0.747 0.897 0.741
1997 Q1 0.748 0.902 0.736
1997 Q2 0.746 0.905 0.721
1997 Q3 0.749 0.907 0.722
1997 Q4 0.749 0.906 0.710
1998 Q1 0.742 0.909 0.699
1998 Q2 0.741 0.908 0.691
1998 Q3 0.744 0.908 0.660
1998 Q4 0.745 0.911 0.648
1999 Q1 0.748 0.913 0.662
1999 Q2 0.750 0.917 0.679
1999 Q3 0.749 0.919 0.673
1999 Q4 0.749 0.922 0.679
2000 Q1 0.747 0.924 0.688
2000 Q2 0.743 0.912 0.676
2000 Q3 0.738 0.918 0.675
2000 Q4 0.732 0.922 0.655
2001 Q1 0.730 0.926 0.655
2001 Q2 0.722 0.926 0.649
2001 Q3 0.726 0.922 0.647
2001 Q4 0.722 0.922 0.633
2002 Q1 0.714 0.926 0.627
2002 Q2 0.713 0.928 0.643
2002 Q3 0.709 0.927 0.640
2002 Q4 0.708 0.927 0.637
2003 Q1 0.709 0.939 0.662
2003 Q2 0.711 0.943 0.715
2003 Q3 0.711 0.942 0.725
2003 Q4 0.717 0.945 0.760
2004 Q1 0.720 0.950 0.759
2004 Q2 0.719 0.953 0.736
2004 Q3 0.724 0.961 0.765
2004 Q4 0.733 0.967 0.819
2005 Q1 0.736 0.971 0.815
2005 Q2 0.739 0.972 0.804
2005 Q3 0.748 0.976 0.832
2005 Q4 0.753 0.981 0.852
2006 Q1 0.751 0.978 0.866
2006 Q2 0.754 0.971 0.891
2006 Q3 0.756 0.965 0.892
2006 Q4 0.751 0.962 0.878
2007 Q1 0.749 0.962 0.854
2007 Q2 0.751 0.959 0.911
2007 Q3 0.753 0.960 0.957
2007 Q4 0.763 0.959 1.019
2008 Q1 0.770 0.953 0.996
2008 Q2 0.768 0.951 0.990
2008 Q3 0.767 0.949 0.960
2008 Q4 0.751 0.938 0.825
2009 Q1 0.744 0.931 0.803
2009 Q2 0.747 0.929 0.857
2009 Q3 0.751 0.927 0.911
2009 Q4 0.755 0.921 0.947
2010 Q1 0.753 0.929 0.961
2010 Q2 0.749 0.929 0.973
2010 Q3 0.749 0.924 0.962
2010 Q4 0.753 0.922 0.987
2011 Q1 0.758 0.920 1.014
2011 Q2 0.763 0.920 1.033
2011 Q3 0.765 0.916 1.020
2011 Q4 0.763 0.913 0.977
2012 Q1 0.764 0.919 0.999
2012 Q2 0.765 0.917 0.990
2012 Q3 0.767 0.919 1.005
2012 Q4 0.768 0.921 1.009
2013 Q1 0.767 0.917 0.991
2013 Q2 0.762 0.921 0.977
2013 Q3 0.760 0.921 0.963
2013 Q4 0.762 0.925 0.953
2014 Q1 0.762 0.925 0.906
2014 Q2 0.761 0.926 0.917
2014 Q3 0.760 0.927 0.918
2014 Q4 0.757 0.926 0.881
2015 Q1 0.748 0.923 0.806
2015 Q2 0.744 0.927 0.813
2015 Q3 0.741 0.924 0.764
2015 Q4 0.736 0.925 0.749
2016 Q1 0.730 0.926 0.727
2016 Q2 0.730 0.934 0.776
2016 Q3 0.727 0.935 0.766

Since the 1970s, the U.S.–Canada PPP for goods has followed a pattern similar to that of the exchange rate, but with significantly less variation. The long depreciation of the exchange rate between the early 1970s and 2002 had a corresponding decline in the goods PPP. In the period after 2002, while both followed similar broad movements, the U.S.–Canada PPP for goods was far less volatile than the market exchange rate.

Prices for services, on the other hand, have a PPP that follows a distinctly different pattern altogether. The services PPP declined during the 1970s and early 1980s, but then began increasing while the exchange rate depreciated. After 2002, the services PPP rose as the exchange rate appreciated, but then entered a period of decline that lasted until 2011 and that did not accord with exchange rate changes. Finally, over the last three years, the services PPP tended to increase while the exchange rate depreciated.

References

Baldwin, J. R. and R. Macdonald. 2009. PPPs: Purchasing Power or Producing Power Parities? Economic Analysis Research Paper Series, no. 58. Statistics Canada Catalogue no. 11F0027M. Ottawa: Statistics Canada.

Canada. Parliament. Senate. Standing Senate Committee on National Finance. 2013. The Canada-USA Price Gap: Report of the Standing Senate Committee on National Finance. 41st Parliament, 1st session. Ottawa: Senate, Parliament of Canada.

Lafrance, R., and L. Schembri. 2002. “Purchasing power parity: Definition, measurement and interpretation.” Bank of Canada Review (autumn): 27–33.

Macdonald, R. 2009. Do Relative Canada/U.S. Prices Equate to the Exchange Rate? Economic Insights, no. 3. Statistics Canada Catalogue no. 11-626-X. Ottawa: Statistics Canada

Taylor, A., and P. Taylor. 2004. “The purchasing power parity debate.” Journal of Economic Perspectives 18 (4): 135–158.

Date modified: