Economic Insights
How big was the Effect of Falling Commodity Prices on Canadian Real Incomes between mid-2014 and mid-2016?

by Ryan Macdonald and Luke Rispoli
Economic Analysis Division

Release date: December 22, 2016

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This Economic Insights article assesses the effect of falling commodity prices on Canadian real income. It is part of a research program that examines links between natural resources and economic growth.

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Introduction

Global prices for commodities began to decline rapidly in the middle of 2014 and continued to decline throughout 2015 and early 2016. As the Bank of Canada's commodity price index (BCPI) shows, price changes in international markets for commodities important to Canada registered a decline of 53.7% from the second quarter (Q2) of 2014 to 2016 Q1 (Chart 1). Despite some improvement in commodity prices in 2016 Q2, commodity prices remained well below the levels recorded two years earlier. While prices declined for a variety of commodities over this period, oil price changes were of particular note. West Texas Intermediate fell from US$105.79 per barrel in June 2014 to US$30.32 per barrel in February 2016.Note 1 Concurrently, the Canada–U.S. exchange rate declined from US$0.91 (US$/CAN$) in September 2014 to US$0.72 in February 2016.Note 2 Together, these price changes constituted a significant relative-price shock for the Canadian economy.

Chart 1 Bank of Canada commodity price index versus United States–Canada exchange rate

Description for Chart 1
Data table for Chart 1
Table summary
This table displays the data for Chart 1. The information is grouped by Year and quarter (appearing as row headers), Exchange rate and Bank of Canada commodity price index, calculated using American dollar/Canadian dollar and Bank of Canada's commodity price index (2001 Quarter 1 equals 100) units of measure (appearing as column headers).
Year and quarter Exchange rate Bank of Canada commodity price index
US$/CAN$ BCPI (2001 Q1=100)
1981 Q1  0.84 122.28
1981 Q2 0.83 123.90
1981 Q3 0.83 120.58
1981 Q4 0.84 117.00
1982 Q1 0.83 114.75
1982 Q2 0.80 113.25
1982 Q3 0.80 111.36
1982 Q4 0.81 110.88
1983 Q1 0.81 112.18
1983 Q2 0.81 114.87
1983 Q3 0.81 112.89
1983 Q4 0.81 110.76
1984 Q1 0.80 113.76
1984 Q2 0.77 113.17
1984 Q3 0.76 107.97
1984 Q4 0.76 104.26
1985 Q1 0.74 101.50
1985 Q2 0.73 102.29
1985 Q3 0.74 98.86
1985 Q4 0.72 98.86
1986 Q1 0.71 88.13
1986 Q2 0.72 86.40
1986 Q3 0.72 84.86
1986 Q4 0.72 86.20
1987 Q1 0.75 91.84
1987 Q2 0.75 96.69
1987 Q3 0.76 99.13
1987 Q4 0.76 97.75
1988 Q1 0.79 100.99
1988 Q2 0.81 108.79
1988 Q3 0.82 105.05
1988 Q4 0.83 105.44
1989 Q1 0.84 112.22
1989 Q2 0.84 110.80
1989 Q3 0.85 107.10
1989 Q4 0.86 107.85
1990 Q1 0.85 108.87
1990 Q2 0.85 105.01
1990 Q3 0.87 111.67
1990 Q4 0.86 113.17
1991 Q1 0.87 102.80
1991 Q2 0.87 101.18
1991 Q3 0.87 97.16
1991 Q4 0.88 97.04
1992 Q1 0.85 97.16
1992 Q2 0.84 100.79
1992 Q3 0.83 101.34
1992 Q4 0.79 100.39
1993 Q1 0.79 105.17
1993 Q2 0.79 101.81
1993 Q3 0.77 97.95
1993 Q4 0.75 100.83
1994 Q1 0.75 103.63
1994 Q2 0.72 103.75
1994 Q3 0.73 103.39
1994 Q4 0.73 104.22
1995 Q1 0.71 107.10
1995 Q2 0.73 108.36
1995 Q3 0.74 111.99
1995 Q4 0.74 114.71
1996 Q1  0.73 114.67
1996 Q2 0.73 118.02
1996 Q3 0.73 116.60
1996 Q4 0.74 119.68
1997 Q1 0.74 117.39
1997 Q2 0.72 111.24
1997 Q3 0.72 108.79
1997 Q4 0.71 109.19
1998 Q1 0.70 98.70
1998 Q2 0.69 96.92
1998 Q3 0.66 92.27
1998 Q4 0.65 90.02
1999 Q1 0.66 91.44
1999 Q2 0.68 100.04
1999 Q3 0.67 107.65
1999 Q4 0.68 111.67
2000 Q1 0.69 120.66
2000 Q2 0.68 127.05
2000 Q3 0.67 132.22
2000 Q4 0.66 139.71
2001 Q1 0.65 131.27
2001 Q2 0.65 125.67
2001 Q3 0.65 108.20
2001 Q4 0.63 94.01
2002 Q1 0.63 100.00
2002 Q2 0.64 110.69
2002 Q3 0.64 109.54
2002 Q4 0.64 114.43
2003 Q1 0.66 134.38
2003 Q2 0.72 129.10
2003 Q3 0.72 128.71
2003 Q4 0.76 132.45
2004 Q1 0.76 147.32
2004 Q2 0.74 159.23
2004 Q3 0.77 161.55
2004 Q4 0.82 168.81
2005 Q1 0.81 176.06
2005 Q2 0.80 186.28
2005 Q3 0.83 214.51
2005 Q4 0.85 227.13
2006 Q1 0.87 210.92
2006 Q2 0.89 217.43
2006 Q3 0.89 214.63
2006 Q4 0.88 207.29
2007 Q1 0.85 211.08
2007 Q2 0.91 227.44
2007 Q3 0.96 223.90
2007 Q4 1.02 244.91
2008 Q1 1.00 273.15
2008 Q2 0.99 329.93
2008 Q3 0.96 307.02
2008 Q4 0.82 189.75
2009 Q1 0.80 161.47
2009 Q2 0.86 180.76
2009 Q3 0.91 187.46
2009 Q4 0.95 208.56
2010 Q1 0.96 226.42
2010 Q2 0.97 222.28
2010 Q3 0.96 217.63
2010 Q4 0.99 236.55
2011 Q1 1.01 261.32
2011 Q2 1.03 280.28
2011 Q3 1.02 263.33
2011 Q4 0.98 258.36
2012 Q1 1.00 258.40
2012 Q2 0.99 246.77
2012 Q3 1.01 250.12
2012 Q4 1.01 241.80
2013 Q1 0.99 247.75
2013 Q2 0.98 251.30
2013 Q3 0.96 257.06
2013 Q4 0.95 239.00
2014 Q1 0.91 254.06
2014 Q2 0.92 262.11
2014 Q3 0.92 250.99
2014 Q4 0.88 210.53
2015 Q1 0.81 161.75
2015 Q2 0.81 175.59
2015 Q3 0.76 150.83
2015 Q4 0.75 137.38
2016 Q1 0.73 121.33
2016 Q2 0.78 144.99
2016 Q3 0.77 144.28

How big was the effect of falling commodity prices on Canada?

Characterizing and examining the size of the relative price shock that emanated from global markets during this period is not straightforward. Growth in real gross domestic product (real GDP) is usually a primary metric used for assessing the size and importance of economic shocks. Real GDP shows that Canada's economic growth, in 2015 and 2016, was the weakest since the 2008-2009 recession. After growing strongly through the last three quarters of 2014, real GDP experienced negative quarterly annualized growth in the first half of 2015 (Q1: −1.1%; Q2: −0.4%), showed positive growth in 2015 Q3 (2.5%), but weakened in 2015 Q4 (0.4%). Real GDP growth then strengthened in 2016 Q1 (2.9%) before falling and rebounding over 2016 Q2 (−1.4%) and 2016 Q3 (3.6%), reflecting production interruptions from wild fires in Fort McMurray, Alberta.Note 3 Real GDP shows a negative aggregate shock, but one that appears more subdued than the magnitude of the changes seen in global commodity and currency markets.

This occurs because the fall in commodity prices is a relative-price shock, one to which real GDP is not well suited for capturing. In this case, an alternative measure of aggregate real income called real gross national income (real GNI) is preferable for illustrating the timing and magnitude of the shock that affected the Canadian economy during the period, and for illustrating the response of particular variables, such as real imports or real gross fixed capital formation (real GFCF).

Real GDP is a measure of production. It is designed to capture changes in the way real inputs relate to real outputs, or to provide a summary measure of how real consumption, real GFCF, real inventories, real exports and real imports progress through time. To this end, measures of real GDP necessarily remove the effect of price changes, including relative-price changes. In the context of falling commodity prices, this means that measures of real GDP adjust only when there is a change in the volume of production. If resource-extracting industries continue to produce, but receive lower profits, there will be little effect on real GDP growth. For a real effect to materialize, falling prices must affect production.

While falling prices do not, of themselves, lead to a change in real GDP, it is important to note that their effect is captured by a change in the GDP deflator. The GDP deflator is designed to illustrate how prices for different components of GDP (e.g., inputs and outputs; or consumption, GFCF, inventories, exports, and imports) change through time. These price changes are the flip side of real GDP. Because each component has a price associated with it, relative-price changes are manifested directly in the GDP deflator. Consequently, when GDP is used to examine economic performance as commodity prices fall, the effect of falling commodity prices is shown predominantly as a deflationary pressure in the GDP deflator.Note 4

Real GNI, on the other hand, focuses on the purchasing power of the income earned by Canadians. It is a measure closely aligned with aggregate demand and with material well-being that encompasses changes in real GDP, trade-related changes in relative prices (notably the terms of trade), and changes to international income. Real GNI thus provides more information about the importance of the relative price shock as it affects the ability of Canadian households, businesses and governments to consume and invest. It is important to note that real GNI also provides information about the mechanisms through which the shock was transmitted to the Canadian economy.

Chart 2 Growth of real gross domestic product versus real gross national income

Description for Chart 2
Data table for Chart 2
Table summary
This table displays the data for Chart 2. The information is grouped by Year and quarter (appearing as row headers), Real gross domestic product and Real gross national income, calculated using percent change, quarter-over-quarter, at annualized rates units of measure (appearing as column headers).
Year and quarter Real gross domestic product Real gross national income
percent change, quarter-over-quarter, at annualized rates
2014 Q1 0.36 2.58
2014 Q2 4.05 2.56
2014 Q3 1.81 1.08
2014 Q4 2.53 0.00
2015 Q1 −1.06 −5.28
2015 Q2 −0.36 −1.81
2015 Q3 2.52 0.73
2015 Q4 0.36 0.73
2016 Q1 2.86 −1.09
2016 Q2 −1.40 1.47
2016 Q3 3.58 3.69

To illustrate the difference in the effect of falling commodity prices on real production and their effect on real income, Chart 2 compares the quarterly annualized growth of real GDP and real GNI. Starting at the second quarter of 2014, when commodity prices and the terms of trade started falling, real GNI growth decelerated. In contrast, real GDP growth dipped in 2014 Q3, but stood at 2.5% at an annualized rate in 2014 Q4. Both measures then reported negative growth for the first two quarters of 2015. Real GNI declined by 5.3% in 2015 Q1 and by 1.8% in 2015 Q2 while real GDP declined by 1.1% and 0.4% in Q1 and Q2 respectively. During the latter half of 2015, real GDP growth returned (particularly in Q3) while real GNI growth was weaker. As commodity prices continued to decline, real GDP growth strengthened in 2016 Q1 before falling and rebounding as wildfires in Fort McMurray disrupted production. Real GNI followed an opposing trajectory, first declining in 2016 Q1 as commodity prices fell, then rising in 2016 Q2 as commodity prices increased, and posting similar growth to GDP in 2016 Q3. Over the period since 2014 Q1, real income (GNI) declined by more, and had weaker growth for longer, than did real production (GDP).

A partial correction

The difference between real GDP and real GNI comes from two non-production sources. The first is the trading gain, which captures changes in the purchasing power of production due to trade-related relative-price changes (primarily the terms of trade). For Canada, terms-of-trade changes are synonymous with changes in resource prices, and they constitute the most important source of non-production real-income growth.Note 5 The second is the effect of international income, which accounts for income earned abroad by Canadians and income earned in Canada by foreigners.

Chart 3 Cumulative growth of real gross domestic product versus real gross national income

Description for Chart 3
Data table for Chart 3
Table summary
This table displays the data for Chart 3. The information is grouped by Year and quarter (appearing as row headers), Real gross domestic product and Real gross national income, calculated using index (2001 Quarter 3 equals 100) units of measure (appearing as column headers).
Year and quarter Real gross domestic product Real gross national income
index (2001 Q3=100)
1981 Q1 59.06 59.60
1981 Q2 59.77 60.22
1981 Q3 59.18 59.23
1981 Q4 58.95 59.35
1982 Q1 58.25 58.23
1982 Q2 57.54 57.23
1982 Q3 57.08 56.73
1982 Q4 56.49 56.61
1983 Q1 57.43 57.86
1983 Q2 58.60 58.73
1983 Q3 59.30 59.48
1983 Q4 60.00 60.22
1984 Q1 61.05 61.10
1984 Q2 62.22 62.22
1984 Q3 62.46 62.47
1984 Q4 63.51 63.22
1985 Q1 64.44 64.09
1985 Q2 64.68 64.71
1985 Q3 65.50 65.21
1985 Q4 66.43 66.08
1986 Q1 66.43 65.21
1986 Q2 66.90 65.96
1986 Q3 66.90 66.33
1986 Q4 66.43 65.09
1987 Q1 67.95 67.46
1987 Q2 68.89 68.58
1987 Q3 69.94 69.70
1987 Q4 70.88 70.57
1988 Q1 71.81 71.82
1988 Q2 72.51 72.07
1988 Q3 72.51 72.94
1988 Q4 72.98 72.82
1989 Q1 73.80 73.69
1989 Q2 74.15 74.44
1989 Q3 74.39 74.81
1989 Q4 74.27 74.44
1990 Q1 74.97 74.81
1990 Q2 74.62 74.06
1990 Q3 74.15 73.94
1990 Q4 73.45 73.07
1991 Q1 72.40 72.07
1991 Q2 72.75 72.32
1991 Q3 72.75 72.19
1991 Q4 72.98 72.57
1992 Q1 72.98 72.32
1992 Q2 73.10 72.32
1992 Q3 73.45 72.82
1992 Q4 73.92 72.44
1993 Q1 74.39 73.69
1993 Q2 74.97 74.19
1993 Q3 75.79 74.44
1993 Q4 76.02 74.56
1994 Q1 77.19 75.94
1994 Q2 78.36 76.31
1994 Q3 79.30 78.05
1994 Q4 79.88 78.68
1995 Q1 80.58 79.55
1995 Q2 80.70 79.80
1995 Q3 80.70 80.67
1995 Q4 81.05 80.92
1996 Q1 81.17 80.92
1996 Q2 81.75 81.55
1996 Q3 82.46 82.29
1996 Q4 83.04 83.54
1997 Q1 84.21 84.29
1997 Q2 85.15 85.04
1997 Q3 86.08 85.79
1997 Q4 86.90 86.78
1998 Q1 88.19 87.16
1998 Q2 88.19 87.03
1998 Q3 89.01 86.66
1998 Q4 90.29 87.91
1999 Q1 91.81 89.90
1999 Q2 92.63 91.52
1999 Q3 94.04 93.27
1999 Q4 95.44 94.14
2000 Q1 96.96 97.38
2000 Q2 98.13 98.75
2000 Q3 99.06 100.50
2000 Q4 99.30 101.25
2001 Q1 99.77 102.12
2001 Q2 100.00 101.37
2001 Q3 100.00 100.00
2001 Q4 100.58 98.88
2002 Q1 102.11 101.12
2002 Q2 102.69 102.87
2002 Q3 103.51 103.49
2002 Q4 104.09 103.99
2003 Q1 104.68 106.61
2003 Q2 104.56 105.24
2003 Q3 104.91 106.73
2003 Q4 105.61 107.86
2004 Q1 106.43 109.73
2004 Q2 107.72 111.22
2004 Q3 109.01 113.09
2004 Q4 109.71 113.59
2005 Q1 110.18 114.34
2005 Q2 110.88 115.46
2005 Q3 112.28 118.20
2005 Q4 113.33 119.83
2006 Q1 114.27 120.20
2006 Q2 114.39 120.95
2006 Q3 114.62 121.32
2006 Q4 115.09 121.20
2007 Q1 115.79 122.32
2007 Q2 116.96 124.31
2007 Q3 117.43 125.19
2007 Q4 117.66 126.93
2008 Q1 117.66 128.68
2008 Q2 118.13 130.05
2008 Q3 119.06 129.68
2008 Q4 117.66 122.69
2009 Q1 114.97 119.08
2009 Q2 113.68 118.08
2009 Q3 114.27 119.58
2009 Q4 115.56 122.32
2010 Q1 116.96 123.94
2010 Q2 117.54 124.31
2010 Q3 118.36 124.56
2010 Q4 119.77 127.56
2011 Q1 120.58 128.93
2011 Q2 120.82 129.80
2011 Q3 122.57 131.05
2011 Q4 123.51 131.67
2012 Q1 123.51 132.17
2012 Q2 123.98 131.92
2012 Q3 124.21 132.04
2012 Q4 124.33 132.54
2013 Q1 125.61 135.16
2013 Q2 126.43 135.16
2013 Q3 127.49 136.03
2013 Q4 128.77 136.78
2014 Q1 128.89 137.66
2014 Q2 130.18 138.53
2014 Q3 130.76 138.90
2014 Q4 131.58 138.90
2015 Q1 131.23 137.03
2015 Q2 131.11 136.41
2015 Q3 131.93 136.66
2015 Q4 132.05 136.91
2016 Q1 132.98 136.53
2016 Q2 132.51 137.03
2016 Q3 133.68 138.28

From the early 2000s to 2015, the non-production sources of real-income growth contributed significantly to real GNI, leading it to grow more rapidly than real GDP. The effect of non-production sources can be seen in Chart 3 as the difference between real GDP (the dashed black line) and real GNI (the solid blue line). From the early 1980s to late 1990s, non-production sources of real-income growth had a minor effect. While they were present, their contribution was small compared to changes in real GDP, and the two series moved in tandem as a result. However, the effect of non-production income sources became more pronounced between 2000 and 2016. This covers a period of rising and falling resource prices that has been characterized as a commodity super-cycle.Note 6 The effect of non-production sources during this period was to create a significant divergence between real GDP and real GNI, one that persisted even as resource prices cycled downward.

As of 2016 Q3, the price of commodities important to Canada, as measured by the BCPI, had returned to a level similar to that observed in late 2003 and early 2004. However, while smaller, the gap between real GDP and real GNI persisted and was nevertheless significant in 2016 Q3. This can be seen in Chart 4, where the cumulative growth in the BCPI is compared to the cumulative contribution of the non-production factors of real-income growth. Both series use 2003 Q1 as a base, and can be interpreted as the compound growth experienced from that date forward or backward through time. The series are shown on different axes given the differences in the magnitudes of the changes that occurred.

Chart 4 Bank of Canada commodity price index and non-production sources of real-income growth (cumulative effect)

Description for Chart 4
Data table for Chart 4
Table summary
This table displays the data for Chart 4. The information is grouped by Year and quarter (appearing as row headers), Non-production sources of real-income growth and Bank of Canada commodity price index, calculated using non-production sources (2001 Quarter 3 equals 100) and Bank of Canada commodity price index (2001 Quarter 3 equals 100) units of measure (appearing as column headers).
Year and quarter Non-production sources of real-income growth Bank of Canada commodity price index
non-production sources (2001 Q3=100) BCPI (2001 Q3=100)
1981 Q1 100.91 113.01
1981 Q2 100.77 114.50
1981 Q3 100.08 111.44
1981 Q4 100.69 108.13
1982 Q1 99.97 106.05
1982 Q2 99.46 104.66
1982 Q3 99.40 102.92
1982 Q4 100.21 102.48
1983 Q1 100.75 103.68
1983 Q2 100.22 106.16
1983 Q3 100.30 104.34
1983 Q4 100.37 102.37
1984 Q1 100.07 105.14
1984 Q2 100.00 104.59
1984 Q3 100.02 99.78
1984 Q4 99.54 96.36
1985 Q1 99.45 93.80
1985 Q2 100.05 94.53
1985 Q3 99.56 91.36
1985 Q4 99.48 91.36
1986 Q1 98.16 81.45
1986 Q2 98.59 79.85
1986 Q3 99.15 78.43
1986 Q4 97.97 79.66
1987 Q1 99.27 84.88
1987 Q2 99.55 89.36
1987 Q3 99.66 91.62
1987 Q4 99.57 90.34
1988 Q1 100.01 93.33
1988 Q2 99.39 100.55
1988 Q3 100.59 97.08
1988 Q4 99.77 97.45
1989 Q1 99.85 103.72
1989 Q2 100.39 102.41
1989 Q3 100.57 98.98
1989 Q4 100.23 99.67
1990 Q1 99.79 100.62
1990 Q2 99.26 97.05
1990 Q3 99.71 103.21
1990 Q4 99.48 104.59
1991 Q1 99.55 95.01
1991 Q2 99.41 93.51
1991 Q3 99.24 89.80
1991 Q4 99.43 89.69
1992 Q1 99.09 89.80
1992 Q2 98.93 93.15
1992 Q3 99.14 93.66
1992 Q4 98.01 92.78
1993 Q1 99.07 97.19
1993 Q2 98.96 94.10
1993 Q3 98.22 90.52
1993 Q4 98.08 93.19
1994 Q1 98.37 95.77
1994 Q2 97.38 95.88
1994 Q3 98.43 95.55
1994 Q4 98.49 96.32
1995 Q1 98.72 98.98
1995 Q2 98.88 100.15
1995 Q3 99.96 103.50
1995 Q4 99.84 106.01
1996 Q1 99.70 105.98
1996 Q2 99.75 109.07
1996 Q3 99.80 107.76
1996 Q4 100.60 110.60
1997 Q1 100.09 108.49
1997 Q2 99.87 102.81
1997 Q3 99.66 100.55
1997 Q4 99.86 100.91
1998 Q1 98.83 91.22
1998 Q2 98.69 89.58
1998 Q3 97.36 85.28
1998 Q4 97.36 83.20
1999 Q1 97.92 84.51
1999 Q2 98.80 92.46
1999 Q3 99.18 99.49
1999 Q4 98.64 103.21
2000 Q1 100.44 111.52
2000 Q2 100.64 117.42
2000 Q3 101.45 122.19
2000 Q4 101.96 129.12
2001 Q1 102.36 121.32
2001 Q2 101.37 116.14
2001 Q3 100.00 100.00
2001 Q4 98.30 86.88
2002 Q1 99.04 92.42
2002 Q2 100.17 102.30
2002 Q3 99.98 101.24
2002 Q4 99.90 105.76
2003 Q1 101.84 124.20
2003 Q2 100.65 119.31
2003 Q3 101.74 118.95
2003 Q4 102.12 122.41
2004 Q1 103.09 136.15
2004 Q2 103.25 147.16
2004 Q3 103.75 149.31
2004 Q4 103.54 156.01
2005 Q1 103.78 162.72
2005 Q2 104.13 172.16
2005 Q3 105.28 198.25
2005 Q4 105.73 209.91
2006 Q1 105.19 194.93
2006 Q2 105.74 200.95
2006 Q3 105.85 198.36
2006 Q4 105.31 191.58
2007 Q1 105.64 195.08
2007 Q2 106.29 210.20
2007 Q3 106.61 206.92
2007 Q4 107.88 226.35
2008 Q1 109.36 252.44
2008 Q2 110.09 304.92
2008 Q3 108.91 283.75
2008 Q4 104.28 175.36
2009 Q1 103.57 149.23
2009 Q2 103.87 167.06
2009 Q3 104.64 173.25
2009 Q4 105.85 192.75
2010 Q1 105.97 209.26
2010 Q2 105.76 205.43
2010 Q3 105.24 201.13
2010 Q4 106.50 218.62
2011 Q1 106.92 241.51
2011 Q2 107.43 259.04
2011 Q3 106.91 243.37
2011 Q4 106.61 238.78
2012 Q1 107.01 238.81
2012 Q2 106.41 228.06
2012 Q3 106.31 231.16
2012 Q4 106.61 223.47
2013 Q1 107.60 228.97
2013 Q2 106.90 232.25
2013 Q3 106.71 237.57
2013 Q4 106.22 220.88
2014 Q1 106.80 234.80
2014 Q2 106.42 242.24
2014 Q3 106.23 231.96
2014 Q4 105.57 194.57
2015 Q1 104.42 149.49
2015 Q2 104.04 162.28
2015 Q3 103.58 139.40
2015 Q4 103.68 126.97
2016 Q1 102.67 112.14
2016 Q2 103.41 134.00
2016 Q3 103.44 133.35

Between 1981 and 2014, a positive correlation existed between commodity prices and the non-production sources of real-income growth. This relationship was maintained during the commodity boom, and for much of the downturn that followed. The collapse of commodity prices from mid-2014 to 2016 Q1, however, shows a disconnect from this relationship. The non-production sources of growth did not fall as much as could have been expected given the size of the commodity price collapse and their historical relationship with commodity prices.

From real production to real income

To move from real production (real GDP) to real income (real GNI) requires two steps. The first is to adjust real GDP for the trading gain, which reflects changes in the purchasing power of real production.Note 7 The second is to adjust for international income flows. Of the two, the former is the more important for real-income growth, and it is the source of growth whose behaviour changed significantly around the middle of the 2000s (Chart 5).

The trading gain itself consists of two effects: a real exchange rate effect and a terms-of-trade effect. The real exchange rate used here captures the effect of earning more (or less) in real terms from net exports in terms of domestic commodities.Note 8 The trade-off between the price of traded commodities and the price of domestic commodities is approximated as the trade-off between an average of export and import prices versus the domestic price level. It is not the same as the relative price-level-adjusted nominal exchange rate, commonly referred to as the "real exchange rate" in macroeconomics. In general, the effect of the real exchange rate on real-income growth is quite small for Canada.Note 9

Chart 5 Trading gain and net income from abroad, cumulative growth differential since 2002 Q1

Description for Chart 5
Data table for Chart 5
Table summary
This table displays the data for Chart 5. The information is grouped by Year and quarter (appearing as row headers), Trading gain and Net income from abroad, calculated using index (2002 Quarter one equals 100) units of measure (appearing as column headers).
Year and quarter Trading gain Net income from abroad
index (2002 Q1=100)
1981 Q1 101.18 101.37
1981 Q2 101.26 101.01
1981 Q3 100.97 100.60
1981 Q4 101.06 101.30
1982 Q1 100.52 101.23
1982 Q2 100.39 100.79
1982 Q3 100.30 100.98
1982 Q4 100.54 101.35
1983 Q1 100.54 101.90
1983 Q2 100.63 101.35
1983 Q3 100.64 101.40
1983 Q4 100.41 101.62
1984 Q1 100.30 101.31
1984 Q2 100.47 100.88
1984 Q3 100.04 101.35
1984 Q4 99.78 101.30
1985 Q1 99.87 100.92
1985 Q2 100.11 101.37
1985 Q3 99.81 101.11
1985 Q4 99.72 101.00
1986 Q1 98.98 100.41
1986 Q2 98.96 100.95
1986 Q3 98.98 101.41
1986 Q4 99.08 100.22
1987 Q1 99.34 101.08
1987 Q2 99.74 101.04
1987 Q3 99.94 100.95
1987 Q4 100.12 100.58
1988 Q1 100.08 100.97
1988 Q2 100.11 100.37
1988 Q3 100.65 100.91
1988 Q4 100.62 100.12
1989 Q1 100.96 99.80
1989 Q2 100.93 100.42
1989 Q3 100.91 100.50
1989 Q4 100.75 100.34
1990 Q1 100.40 100.37
1990 Q2 100.34 99.81
1990 Q3 100.51 100.20
1990 Q4 100.28 100.11
1991 Q1 100.19 100.42
1991 Q2 99.97 100.50
1991 Q3 99.76 100.47
1991 Q4 99.87 100.66
1992 Q1 99.80 100.23
1992 Q2 99.67 100.30
1992 Q3 99.62 100.50
1992 Q4 99.22 99.82
1993 Q1 99.48 100.55
1993 Q2 99.41 100.38
1993 Q3 98.82 100.29
1993 Q4 98.82 100.13
1994 Q1 99.11 100.17
1994 Q2 98.61 99.66
1994 Q3 98.98 100.08
1994 Q4 99.19 100.02
1995 Q1 99.41 99.91
1995 Q2 99.81 99.76
1995 Q3 100.21 100.26
1995 Q4 100.32 100.05
1996 Q1 100.41 99.91
1996 Q2 100.31 100.09
1996 Q3 100.41 99.95
1996 Q4 100.89 100.23
1997 Q1 100.74 99.89
1997 Q2 100.01 100.41
1997 Q3 100.02 99.99
1997 Q4 99.82 100.30
1998 Q1 99.14 100.11
1998 Q2 99.01 99.93
1998 Q3 98.16 99.51
1998 Q4 98.05 99.67
1999 Q1 98.20 99.87
1999 Q2 98.95 100.04
1999 Q3 99.47 99.76
1999 Q4 99.85 98.81
2000 Q1 100.46 100.00
2000 Q2 100.64 100.04
2000 Q3 101.14 100.25
2000 Q4 101.49 100.37
2001 Q1 102.20 100.05
2001 Q2 101.18 100.11
2001 Q3 100.00 100.00
2001 Q4 98.75 99.58
2002 Q1 98.77 100.21
2002 Q2 99.62 100.51
2002 Q3 99.46 100.33
2002 Q4 99.97 99.75
2003 Q1 101.26 100.43
2003 Q2 100.72 99.79
2003 Q3 101.35 100.22
2003 Q4 101.59 100.31
2004 Q1 102.33 100.49
2004 Q2 102.58 100.48
2004 Q3 102.95 100.54
2004 Q4 103.03 100.13
2005 Q1 103.09 100.38
2005 Q2 103.10 100.70
2005 Q3 104.24 100.69
2005 Q4 105.30 99.96
2006 Q1 104.28 100.45
2006 Q2 104.26 101.05
2006 Q3 104.23 101.11
2006 Q4 104.17 100.71
2007 Q1 104.74 100.38
2007 Q2 105.04 100.77
2007 Q3 104.86 101.18
2007 Q4 106.11 101.26
2008 Q1 107.49 101.29
2008 Q2 108.37 101.12
2008 Q3 107.45 100.82
2008 Q4 103.54 100.32
2009 Q1 102.29 100.93
2009 Q2 102.84 100.74
2009 Q3 103.72 100.68
2009 Q4 104.82 100.66
2010 Q1 105.40 100.17
2010 Q2 104.90 100.41
2010 Q3 104.55 100.24
2010 Q4 105.31 100.74
2011 Q1 106.11 100.30
2011 Q2 106.32 100.57
2011 Q3 105.86 100.58
2011 Q4 105.97 100.17
2012 Q1 105.84 100.65
2012 Q2 105.08 100.81
2012 Q3 105.45 100.40
2012 Q4 105.94 100.13
2013 Q1 105.95 101.06
2013 Q2 105.58 100.78
2013 Q3 105.51 100.63
2013 Q4 105.29 100.41
2014 Q1 105.88 100.42
2014 Q2 105.11 100.70
2014 Q3 105.10 100.50
2014 Q4 104.28 100.64
2015 Q1 103.29 100.54
2015 Q2 103.07 100.43
2015 Q3 102.38 100.69
2015 Q4 102.01 101.12
2016 Q1 101.33 100.81
2016 Q2 101.82 101.06
2016 Q3 102.03 100.88

The terms of trade—the ratio of export prices to import prices—is more important. It captures changes in the volume of imports that can be purchased with a given volume of exports resulting from changes in their relative prices. When the terms of trade deteriorate, for example, because oil prices are falling, the volume of imports that each barrel of oil can purchase declines.

During the resource boom, commodity-price-driven terms-of-trade improvements led to significant increases in Canada's trading gain. Between 2001 Q3 and 2008 Q3, the trading gain added 1.1 percentage points to the average quarterly annualized growth rate of real GNI (Table 1). Once commodity prices began declining, the contribution of the trading gain became negative, subtracting 5.8 percentage points from average quarterly annualized real-GNI growth during the global recession and 0.9 percentage points between 2011 Q2 and 2016 Q2.

The effect is larger when the recent collapse in commodity prices is examined separately from the period of slowly declining commodity prices that occurred following the recovery from the 2008-2009 recession. During the period after 2014 Q2, when commodity prices declined sharply, the terms of trade subtracted an average of 1.3 percentage points from real GNI growth. This was roughly 22% of the size of the shock from the trading gain during the 2008-2009 recession.

Table 1
Sources of real gross national income growth
Table summary
This table displays the results of Sources of real gross national income growth. Contribution to real gross national income, Real gross national income, Real gross domestic product, Trading gain, Real exchange rate, Terms of trade and Net income from abroad, calculated using percent units of measure (appearing as column headers).
  Contribution to real gross national income Real gross national income
Real gross domestic product Trading gain Real exchange rate Terms of trade Net income from abroad
percentTable 1 Note 1
2001 Q3 to 2008 Q3 2.6 1.1 −0.1 1.1 0.1 3.8
2008 Q3 to 2009 Q2 −6.1 −5.8 0.1 −5.9 −0.1 -11.7
2009 Q2 to 2011 Q2 3.2 1.7 0.0 1.7 −0.1 4.9
2011 Q2 to 2016 Q3 1.9 −0.9 0.0 −0.9 0.1 1.1
2011 Q2 to 2014 Q2 2.6 −0.4 0.0 −0.4 0.0 2.2
2014 Q2 to 2016 Q3 1.2 −1.3 0.0 −1.4 0.1 −0.1

The second factor that contributes to differences between real-GNI growth and real-GDP growth is net income from abroad (NIFA). NIFA captures the effect of foreign investment and foreign workers. When a Canadian company repatriates earnings from foreign investments, the amount of money available to purchase goods and services in Canada rises, and the opposite occurs when foreign companies repatriate earnings from their investments in Canada. Similarly, when foreigners earn income in Canadian labour markets, it then leaves the country.Note 10 In both cases, the level of income earned by Canadians is different from the level of income earned in Canada.

The effect of real NIFA on real GNI tended to be positive from the mid-1990s to the mid-2000s. That decade saw important changes in Canadians' ability to invest internationally, which led to increased stocks of Canadian foreign investments.Note 11 These investments, in turn, contributed to rising income earned abroad by Canadians compared with the income earned in Canada by foreigners. Consequently, during the resource boom, there were an additional 0.1 percentage points of average quarterly annualized real-GNI growth that came from real NIFA. Around the 2008-2009 recession, the contribution of real NIFA became negative, but it returned to making positive contributions to growth after 2010.

The non-production sources of real-income growth created a divergence between real-GDP growth and real-GNI growth during the resource cycle. During the upswing, real-GNI growth outpaced real-GDP growth, while the converse occurred during the downswing. Over this period, real GNI exhibited greater variability and a greater range of growth rates than did real GDP. Moreover, as noted above, the downswing did not completely unwind the effects of the upswing.

In practical terms, this means that gains in real GNI (real income) over and above the gains from increases in real production (real GDP) persisted in the economy even after resource prices (the main source of the gains) had returned to levels similar to those observed at the start of the cycle. That this gap had not closed as resource prices declined is important for two reasons.

First, it illustrates that the effects of the resource boom were not wholly temporary. Previous research supports the notion that resource cycles represent periods where real-income growth can outpace real-production growth, and that a portion of the growth that takes place during the cyclical upswing is permanent.Note 12 The implication is that, for Canada, the terms-of-trade cycles driven by resource prices have positive long-run effects.

Second, previous research also demonstrates that growth in economic aggregates, such as real investment or real consumption, can depend importantly on non-production sources of real-income growth.Note 13 Consequently, during periods when changes in the terms of trade become important sources of real-income growth, it is not possible to understand the progression of these types of aggregates by analyzing only real GDP.

The progress of gross domestic product sub-aggregates

In general, over the resource boom, when countries experienced improving terms of trade, their consumption and investment growth outpaced their real-GDP growth. When countries experienced declining terms of trade, their consumption and investment lagged behind real-GDP growth.Note 14 In effect, the terms of trade behaved much like multifactor productivity, and accelerated growth in material living standards when the terms of trade improved, or held back advances in material living standards when they deteriorated.Note 15

For Canada, changes in the terms of trade elicit these types of responses in economic aggregates, and these changes can be difficult to interpret if real GDP is used in isolation. The progress of real consumption, real GFCF and real imports follow paths through time that have a greater relationship with real GNI than with real GDP. In certain cases, such as consumption, the trend growth rate is influenced more than are cyclical factors, while in others, such as real GFCF, cyclical factors can be amplified.

During downturns, relative price changes constitute an important transmission mechanism for shocks affecting the Canadian economy. During the 2008-2009 recession and the downturn in resource prices, changes in components of real GDP typically exhibited growth rate patterns more in line with real GNI than with real GDP (Table 2). During the recession, real imports and real GFCF declined at a quarterly annualized rate of around 20%, while real consumption growth stalled. Real GDP declined by 6% while real GNI declined at nearly double that rate. The relative price shock from falling commodity prices furthered the effect of falling foreign aggregate demand. A similar effect from falling commodity prices occurred after 2011 Q2 when falling commodity prices again transmitted a relative price shock to the Canadian economy. In the latter period, real GDP growth offset some of the relative price effects, but falling commodity prices none-the-less led to weakness in particular real GDP components.

For Canada, the effect of the resource price collapse on real final consumption is not well reflected, but the progression of consumption growth during the resource boom and the period of weakening resource prices that occurred thereafter bear a greater relationship with real GNI than with real GDP (Chart 6).Note 16 Real final consumption expenditure progressed more rapidly than real GDP during the resource boom, and more slowly than real GDP during the period of weakening commodity prices.

Chart 6 Real final consumption versus real gross domestic product and real gross national income

Description for Chart 6
Data table for Chart 6
Table summary
This table displays the data for Chart 6. The information is grouped by Year and quarter (appearing as row headers), Real final consumption expenditure, Real gross domestic product and Real gross national income, calculated using index (2002 Quarter one equals 100) units of measure (appearing as column headers).
Year and quarter Real final consumption expenditure Real gross domestic product Real gross national income
index (2002 Q1=100)
1981 Q1 61.75 57.84 58.94
1981 Q2 61.66 58.53 59.55
1981 Q3 61.62 57.96 58.57
1981 Q4 61.76 57.73 58.69
1982 Q1 60.92 57.05 57.59
1982 Q2 60.76 56.35 56.60
1982 Q3 60.76 55.90 56.10
1982 Q4 60.66 55.32 55.98
1983 Q1 60.93 56.24 57.22
1983 Q2 61.78 57.39 58.08
1983 Q3 62.49 58.07 58.82
1983 Q4 62.98 58.76 59.55
1984 Q1 63.40 59.79 60.42
1984 Q2 63.87 60.93 61.53
1984 Q3 64.14 61.17 61.78
1984 Q4 65.18 62.20 62.52
1985 Q1 66.07 63.11 63.38
1985 Q2 66.67 63.34 63.99
1985 Q3 67.42 64.15 64.49
1985 Q4 68.41 65.06 65.35
1986 Q1 68.37 65.06 64.49
1986 Q2 68.80 65.52 65.23
1986 Q3 69.69 65.52 65.60
1986 Q4 69.61 65.06 64.37
1987 Q1 70.25 66.55 66.71
1987 Q2 71.22 67.47 67.82
1987 Q3 71.51 68.49 68.93
1987 Q4 72.38 69.42 69.79
1988 Q1 72.97 70.33 71.02
1988 Q2 73.91 71.01 71.27
1988 Q3 74.34 71.01 72.13
1988 Q4 75.05 71.47 72.01
1989 Q1 75.52 72.27 72.87
1989 Q2 76.53 72.62 73.62
1989 Q3 76.64 72.85 73.98
1989 Q4 76.97 72.74 73.62
1990 Q1 78.27 73.42 73.98
1990 Q2 77.38 73.08 73.24
1990 Q3 77.90 72.62 73.12
1990 Q4 77.99 71.93 72.26
1991 Q1 76.76 70.90 71.27
1991 Q2 78.10 71.25 71.52
1991 Q3 77.90 71.25 71.39
1991 Q4 78.40 71.47 71.77
1992 Q1 78.46 71.47 71.52
1992 Q2 78.55 71.59 71.52
1992 Q3 78.84 71.93 72.01
1992 Q4 79.42 72.39 71.64
1993 Q1 79.48 72.85 72.87
1993 Q2 79.79 73.42 73.37
1993 Q3 79.88 74.22 73.62
1993 Q4 80.00 74.45 73.73
1994 Q1 80.58 75.59 75.10
1994 Q2 80.96 76.74 75.46
1994 Q3 81.24 77.66 77.19
1994 Q4 81.79 78.23 77.81
1995 Q1 81.74 78.91 78.67
1995 Q2 82.12 79.03 78.92
1995 Q3 82.58 79.03 79.78
1995 Q4 82.39 79.38 80.02
1996 Q1 83.22 79.49 80.02
1996 Q2 83.33 80.06 80.65
1996 Q3 83.23 80.76 81.38
1996 Q4 84.30 81.32 82.61
1997 Q1 85.55 82.47 83.36
1997 Q2 85.92 83.39 84.10
1997 Q3 86.80 84.30 84.84
1997 Q4 87.23 85.10 85.82
1998 Q1 87.88 86.37 86.19
1998 Q2 88.43 86.37 86.07
1998 Q3 88.90 87.17 85.70
1998 Q4 89.03 88.42 86.94
1999 Q1 90.25 89.91 88.90
1999 Q2 91.07 90.72 90.51
1999 Q3 92.28 92.10 92.24
1999 Q4 92.96 93.47 93.10
2000 Q1 93.97 94.96 96.30
2000 Q2 94.84 96.10 97.66
2000 Q3 95.86 97.01 99.39
2000 Q4 96.18 97.25 100.13
2001 Q1 97.08 97.71 100.99
2001 Q2 97.52 97.93 100.25
2001 Q3 97.79 97.93 98.89
2001 Q4 98.71 98.50 97.78
2002 Q1 100.00 100.00 100.00
2002 Q2 101.04 100.57 101.73
2002 Q3 101.45 101.37 102.34
2002 Q4 102.42 101.94 102.84
2003 Q1 103.06 102.52 105.43
2003 Q2 103.78 102.40 104.07
2003 Q3 104.52 102.74 105.55
2003 Q4 104.83 103.43 106.67
2004 Q1 105.98 104.23 108.51
2004 Q2 106.27 105.49 109.99
2004 Q3 107.24 106.76 111.84
2004 Q4 108.06 107.44 112.33
2005 Q1 109.04 107.90 113.07
2005 Q2 109.84 108.59 114.18
2005 Q3 110.56 109.96 116.89
2005 Q4 111.67 110.99 118.50
2006 Q1 112.93 111.91 118.87
2006 Q2 113.98 112.03 119.61
2006 Q3 114.96 112.25 119.98
2006 Q4 116.00 112.71 119.86
2007 Q1 116.80 113.40 120.97
2007 Q2 118.22 114.54 122.93
2007 Q3 119.44 115.00 123.80
2007 Q4 121.07 115.23 125.52
2008 Q1 122.11 115.23 127.25
2008 Q2 122.99 115.69 128.61
2008 Q3 123.05 116.60 128.24
2008 Q4 122.47 115.23 121.33
2009 Q1 122.16 112.59 117.76
2009 Q2 123.08 111.33 116.77
2009 Q3 124.10 111.91 118.26
2009 Q4 124.94 113.17 120.97
2010 Q1 126.26 114.54 122.57
2010 Q2 126.99 115.11 122.93
2010 Q3 127.86 115.91 123.18
2010 Q4 128.99 117.30 126.15
2011 Q1 129.23 118.09 127.50
2011 Q2 129.80 118.32 128.36
2011 Q3 130.37 120.04 129.60
2011 Q4 131.03 120.96 130.21
2012 Q1 131.57 120.96 130.71
2012 Q2 131.64 121.42 130.46
2012 Q3 132.47 121.64 130.58
2012 Q4 132.97 121.76 131.07
2013 Q1 133.25 123.01 133.66
2013 Q2 133.91 123.82 133.66
2013 Q3 134.76 124.86 134.52
2013 Q4 135.59 126.11 135.27
2014 Q1 136.01 126.23 136.14
2014 Q2 137.12 127.49 137.00
2014 Q3 137.74 128.06 137.36
2014 Q4 138.25 128.86 137.36
2015 Q1 138.79 128.52 135.51
2015 Q2 139.39 128.40 134.90
2015 Q3 140.20 129.20 135.15
2015 Q4 140.64 129.32 135.39
2016 Q1 141.57 130.23 135.02
2016 Q2 142.50 129.77 135.51
2016 Q3 143.07 130.92 136.75
Table 2
Growth of real gross domestic product components
Table summary
This table displays the results of Growth of real gross domestic product components. Final consumption expenditure, Gross fixed capital formation, Exports of goods and services, Imports of goods and services, Real gross domestic product and Real gross national income, calculated using percent units of measure (appearing as column headers).
  Final consumption expenditure Gross fixed capital formation Exports of goods and services Imports of goods and services Real gross domestic product Real gross national income
percentTable 2 Note 1
2001 Q3 to 2008 Q3 3.3 4.8 1.0 4.9 2.5 3.8
2008 Q3 to 2009 Q2 0.0 −18.5 −21.2 −21.4 −6.0 −11.7
2009 Q2 to 2011 Q2 2.7 9.4 5.4 11.8 3.1 4.8
2011 Q2 to 2016 Q3 1.9 −0.1 3.6 1.5 1.9 1.2
2011 Q2 to 2014 Q2 1.8 2.3 5.1 2.6 2.5 2.2
2014 Q2 to 2016 Q3 1.9 −3.1 1.6 0.1 1.2 −0.1

Real final consumption is also the metric in final demand that exhibits the least cyclicality. During the previous three recessions, real consumption did not adjust downward as sharply as aggregate real income, real production or other components of real final domestic demand.

Real GFCF and real imports responded more strongly, and thus reflect the downturn in commodity prices (Chart 7, Chart 8). Real GFCF responded the most over the 2014 Q2-to-2016 Q3 period, declining sharply as commodity prices collapsed. It is also the metric that showed the largest cyclical response to the 2008-2009 recession, as well as the largest gains during the period of rising resource prices.

Chart 7 Real gross fixed capital formation versus real gross domestic product and real gross national income

Description for Chart 7
Data table for Chart 7
Table summary
This table displays the data for Chart 7. The information is grouped by Year and quarter (appearing as row headers), Real gross fixed capital formation, Real gross domestic product and Real gross national income, calculated using real gross fixed capital formation (2002 Quarter one equals 100) and real gross national income or gross domestic product (2002 Quarter one equals 100) units of measure (appearing as column headers).
Year and quarter Real gross fixed capital formation Real gross domestic product Real gross national income
real GFCF (2002 Q1=100) real GNI or GDP (2002 Q1=100)
1981 Q1 59.55 57.84 58.94
1981 Q2 61.15 58.53 59.55
1981 Q3 59.73 57.96 58.57
1981 Q4 59.11 57.73 58.69
1982 Q1 57.20 57.05 57.59
1982 Q2 53.33 56.35 56.60
1982 Q3 50.96 55.90 56.10
1982 Q4 52.15 55.32 55.98
1983 Q1 51.86 56.24 57.22
1983 Q2 52.96 57.39 58.08
1983 Q3 53.51 58.07 58.82
1983 Q4 53.90 58.76 59.55
1984 Q1 54.02 59.79 60.42
1984 Q2 53.96 60.93 61.53
1984 Q3 54.43 61.17 61.78
1984 Q4 54.48 62.20 62.52
1985 Q1 55.78 63.11 63.38
1985 Q2 58.43 63.34 63.99
1985 Q3 60.25 64.15 64.49
1985 Q4 60.80 65.06 65.35
1986 Q1 61.44 65.06 64.49
1986 Q2 61.27 65.52 65.23
1986 Q3 60.85 65.52 65.60
1986 Q4 61.05 65.06 64.37
1987 Q1 62.61 66.55 66.71
1987 Q2 65.44 67.47 67.82
1987 Q3 68.83 68.49 68.93
1987 Q4 69.92 69.42 69.79
1988 Q1 71.29 70.33 71.02
1988 Q2 72.03 71.01 71.27
1988 Q3 74.43 71.01 72.13
1988 Q4 73.44 71.47 72.01
1989 Q1 76.54 72.27 72.87
1989 Q2 75.93 72.62 73.62
1989 Q3 75.59 72.85 73.98
1989 Q4 78.13 72.74 73.62
1990 Q1 76.96 73.42 73.98
1990 Q2 75.10 73.08 73.24
1990 Q3 73.04 72.62 73.12
1990 Q4 70.43 71.93 72.26
1991 Q1 71.01 70.90 71.27
1991 Q2 70.20 71.25 71.52
1991 Q3 70.43 71.25 71.39
1991 Q4 71.41 71.47 71.77
1992 Q1 70.90 71.47 71.52
1992 Q2 67.98 71.59 71.52
1992 Q3 69.35 71.93 72.01
1992 Q4 66.48 72.39 71.64
1993 Q1 65.74 72.85 72.87
1993 Q2 67.31 73.42 73.37
1993 Q3 68.76 74.22 73.62
1993 Q4 69.72 74.45 73.73
1994 Q1 70.61 75.59 75.10
1994 Q2 72.83 76.74 75.46
1994 Q3 72.88 77.66 77.19
1994 Q4 73.39 78.23 77.81
1995 Q1 71.57 78.91 78.67
1995 Q2 71.40 79.03 78.92
1995 Q3 71.23 79.03 79.78
1995 Q4 71.57 79.38 80.02
1996 Q1 73.15 79.49 80.02
1996 Q2 73.17 80.06 80.65
1996 Q3 76.16 80.76 81.38
1996 Q4 79.79 81.32 82.61
1997 Q1 81.27 82.47 83.36
1997 Q2 83.47 83.39 84.10
1997 Q3 85.99 84.30 84.84
1997 Q4 86.83 85.10 85.82
1998 Q1 86.65 86.37 86.19
1998 Q2 86.84 86.37 86.07
1998 Q3 87.01 87.17 85.70
1998 Q4 87.98 88.42 86.94
1999 Q1 88.96 89.91 88.90
1999 Q2 91.23 90.72 90.51
1999 Q3 91.97 92.10 92.24
1999 Q4 94.21 93.47 93.10
2000 Q1 95.06 94.96 96.30
2000 Q2 95.71 96.10 97.66
2000 Q3 96.86 97.01 99.39
2000 Q4 97.30 97.25 100.13
2001 Q1 99.95 97.71 100.99
2001 Q2 101.27 97.93 100.25
2001 Q3 102.52 97.93 98.89
2001 Q4 99.75 98.50 97.78
2002 Q1 100.00 100.00 100.00
2002 Q2 101.35 100.57 101.73
2002 Q3 102.94 101.37 102.34
2002 Q4 103.21 101.94 102.84
2003 Q1 104.14 102.52 105.43
2003 Q2 105.18 102.40 104.07
2003 Q3 108.49 102.74 105.55
2003 Q4 110.95 103.43 106.67
2004 Q1 113.55 104.23 108.51
2004 Q2 115.34 105.49 109.99
2004 Q3 117.02 106.76 111.84
2004 Q4 119.02 107.44 112.33
2005 Q1 122.25 107.90 113.07
2005 Q2 125.20 108.59 114.18
2005 Q3 128.58 109.96 116.89
2005 Q4 131.32 110.99 118.50
2006 Q1 133.74 111.91 118.87
2006 Q2 134.93 112.03 119.61
2006 Q3 134.90 112.25 119.98
2006 Q4 135.65 112.71 119.86
2007 Q1 137.61 113.40 120.97
2007 Q2 138.62 114.54 122.93
2007 Q3 139.20 115.00 123.80
2007 Q4 140.86 115.23 125.52
2008 Q1 144.09 115.23 127.25
2008 Q2 143.19 115.69 128.61
2008 Q3 141.96 116.60 128.24
2008 Q4 136.10 115.23 121.33
2009 Q1 122.39 112.59 117.76
2009 Q2 121.81 111.33 116.77
2009 Q3 125.63 111.91 118.26
2009 Q4 131.55 113.17 120.97
2010 Q1 136.19 114.54 122.57
2010 Q2 139.09 115.11 122.93
2010 Q3 140.67 115.91 123.18
2010 Q4 143.15 117.30 126.15
2011 Q1 144.67 118.09 127.50
2011 Q2 145.92 118.32 128.36
2011 Q3 146.50 120.04 129.60
2011 Q4 147.93 120.96 130.21
2012 Q1 152.08 120.96 130.71
2012 Q2 153.64 121.42 130.46
2012 Q3 153.39 121.64 130.58
2012 Q4 154.51 121.76 131.07
2013 Q1 155.09 123.01 133.66
2013 Q2 155.06 123.82 133.66
2013 Q3 155.35 124.86 134.52
2013 Q4 155.99 126.11 135.27
2014 Q1 154.26 126.23 136.14
2014 Q2 156.07 127.49 137.00
2014 Q3 158.39 128.06 137.36
2014 Q4 158.18 128.86 137.36
2015 Q1 153.25 128.52 135.51
2015 Q2 150.03 128.40 134.90
2015 Q3 148.67 129.20 135.15
2015 Q4 146.37 129.32 135.39
2016 Q1 145.97 130.23 135.02
2016 Q2 145.83 129.77 135.51
2016 Q3 145.37 130.92 136.75

 

Chart 8 Real imports versus real gross domestic product and real gross national income

Description for Chart 8
Data table for Chart 8
Table summary
This table displays the data for Chart 8. The information is grouped by Year and quarter (appearing as row headers), Real imports of goods and services, Real gross domestic product and Real gross national income, calculated using real imports (2002 Quarter one equals 100) and real gross national income or gross domestic product (2002 Quarter one equals 100) units of measure (appearing as column headers).
Year and quarter Real imports of goods and services Real gross domestic product Real gross national income
real imports (2002 Q1=100) real GNI or GDP (2002 Q1=100)
1981 Q1 33.16 57.84 58.94
1981 Q2 35.24 58.53 59.55
1981 Q3 33.64 57.96 58.57
1981 Q4 32.35 57.73 58.69
1982 Q1 29.85 57.05 57.59
1982 Q2 28.24 56.35 56.60
1982 Q3 28.13 55.90 56.10
1982 Q4 26.71 55.32 55.98
1983 Q1 28.23 56.24 57.22
1983 Q2 29.54 57.39 58.08
1983 Q3 31.99 58.07 58.82
1983 Q4 34.65 58.76 59.55
1984 Q1 36.00 59.79 60.42
1984 Q2 36.43 60.93 61.53
1984 Q3 37.64 61.17 61.78
1984 Q4 36.09 62.20 62.52
1985 Q1 37.64 63.11 63.38
1985 Q2 39.54 63.34 63.99
1985 Q3 40.51 64.15 64.49
1985 Q4 40.74 65.06 65.35
1986 Q1 41.57 65.06 64.49
1986 Q2 41.29 65.52 65.23
1986 Q3 43.03 65.52 65.60
1986 Q4 42.99 65.06 64.37
1987 Q1 42.57 66.55 66.71
1987 Q2 43.19 67.47 67.82
1987 Q3 44.35 68.49 68.93
1987 Q4 47.94 69.42 69.79
1988 Q1 49.81 70.33 71.02
1988 Q2 49.82 71.01 71.27
1988 Q3 51.05 71.01 72.13
1988 Q4 51.60 71.47 72.01
1989 Q1 52.97 72.27 72.87
1989 Q2 53.32 72.62 73.62
1989 Q3 52.98 72.85 73.98
1989 Q4 54.81 72.74 73.62
1990 Q1 55.16 73.42 73.98
1990 Q2 55.31 73.08 73.24
1990 Q3 54.25 72.62 73.12
1990 Q4 53.54 71.93 72.26
1991 Q1 53.63 70.90 71.27
1991 Q2 54.71 71.25 71.52
1991 Q3 57.24 71.25 71.39
1991 Q4 58.33 71.47 71.77
1992 Q1 58.22 71.47 71.52
1992 Q2 58.83 71.59 71.52
1992 Q3 59.81 71.93 72.01
1992 Q4 58.56 72.39 71.64
1993 Q1 61.22 72.85 72.87
1993 Q2 63.15 73.42 73.37
1993 Q3 63.51 74.22 73.62
1993 Q4 65.17 74.45 73.73
1994 Q1 65.14 75.59 75.10
1994 Q2 68.14 76.74 75.46
1994 Q3 68.76 77.66 77.19
1994 Q4 72.04 78.23 77.81
1995 Q1 72.06 78.91 78.67
1995 Q2 72.65 79.03 78.92
1995 Q3 72.28 79.03 79.78
1995 Q4 73.07 79.38 80.02
1996 Q1 74.64 79.49 80.02
1996 Q2 74.55 80.06 80.65
1996 Q3 77.37 80.76 81.38
1996 Q4 79.05 81.32 82.61
1997 Q1 83.86 82.47 83.36
1997 Q2 85.74 83.39 84.10
1997 Q3 89.31 84.30 84.84
1997 Q4 90.65 85.10 85.82
1998 Q1 91.83 86.37 86.19
1998 Q2 92.34 86.37 86.07
1998 Q3 90.18 87.17 85.70
1998 Q4 93.88 88.42 86.94
1999 Q1 95.69 89.91 88.90
1999 Q2 97.45 90.72 90.51
1999 Q3 99.86 92.10 92.24
1999 Q4 104.92 93.47 93.10
2000 Q1 107.21 94.96 96.30
2000 Q2 107.81 96.10 97.66
2000 Q3 108.85 97.01 99.39
2000 Q4 107.86 97.25 100.13
2001 Q1 104.94 97.71 100.99
2001 Q2 104.26 97.93 100.25
2001 Q3 101.92 97.93 98.89
2001 Q4 99.42 98.50 97.78
2002 Q1 100.00 100.00 100.00
2002 Q2 104.79 100.57 101.73
2002 Q3 106.74 101.37 102.34
2002 Q4 106.49 101.94 102.84
2003 Q1 107.45 102.52 105.43
2003 Q2 107.64 102.40 104.07
2003 Q3 107.75 102.74 105.55
2003 Q4 112.85 103.43 106.67
2004 Q1 113.84 104.23 108.51
2004 Q2 116.96 105.49 109.99
2004 Q3 120.26 106.76 111.84
2004 Q4 121.59 107.44 112.33
2005 Q1 125.71 107.90 113.07
2005 Q2 124.78 108.59 114.18
2005 Q3 126.91 109.96 116.89
2005 Q4 129.82 110.99 118.50
2006 Q1 131.01 111.91 118.87
2006 Q2 134.52 112.03 119.61
2006 Q3 134.26 112.25 119.98
2006 Q4 134.33 112.71 119.86
2007 Q1 137.22 113.40 120.97
2007 Q2 139.44 114.54 122.93
2007 Q3 142.78 115.00 123.80
2007 Q4 145.41 115.23 125.52
2008 Q1 145.85 115.23 127.25
2008 Q2 146.94 115.69 128.61
2008 Q3 142.88 116.60 128.24
2008 Q4 134.01 115.23 121.33
2009 Q1 121.12 112.59 117.76
2009 Q2 119.27 111.33 116.77
2009 Q3 126.76 111.91 118.26
2009 Q4 131.62 113.17 120.97
2010 Q1 137.55 114.54 122.57
2010 Q2 141.41 115.11 122.93
2010 Q3 144.00 115.91 123.18
2010 Q4 144.50 117.30 126.15
2011 Q1 147.81 118.09 127.50
2011 Q2 149.19 118.32 128.36
2011 Q3 150.32 120.04 129.60
2011 Q4 151.78 120.96 130.21
2012 Q1 154.64 120.96 130.71
2012 Q2 154.44 121.42 130.46
2012 Q3 156.18 121.64 130.58
2012 Q4 155.37 121.76 131.07
2013 Q1 157.38 123.01 133.66
2013 Q2 157.48 123.82 133.66
2013 Q3 157.67 124.86 134.52
2013 Q4 158.34 126.11 135.27
2014 Q1 156.62 126.23 136.14
2014 Q2 161.31 127.49 137.00
2014 Q3 162.95 128.06 137.36
2014 Q4 163.55 128.86 137.36
2015 Q1 163.30 128.52 135.51
2015 Q2 163.16 128.40 134.90
2015 Q3 161.37 129.20 135.15
2015 Q4 158.77 129.32 135.39
2016 Q1 159.67 130.23 135.02
2016 Q2 160.25 129.77 135.51
2016 Q3 161.57 130.92 136.75

Real imports also responded, but to a lesser degree. When changes in the terms of trade occur, the adjustment can take place through changes in real imports, through changes in saving, or through a combination of the two. The relationship between imports and real GNI, since 2001 Q3, rather than the relationship between imports and real GDP during this period, illustrates that changes in the terms of trade are an important explanatory variable for real-import growth, and that Canadians make adjustments to the volume of goods and services consumed and invested in response to terms-of-trade shocks.

Conclusion

Canada is a trading nation that depends greatly on natural resource exports to purchase inputs, investment goods and consumer goods. As a result, fluctuations in global resource prices, particularly the price of oil, have important implications for Canada's ability to transform its economic inputs (labour, capital, knowledge, land, natural resources) into the consumer and investment goods and services that Canadian households, firms and governments want to purchase. Real gross domestic product (real GDP) is not well suited to reflect this type of relative price effect.

Although real GDP growth weakened in 2015, it does not fully illustrate the magnitude of the shock that collapsing commodity prices transmitted to the Canadian economy, nor does it allow for an understanding of the recent progression of aggregates, such as real gross fixed capital formation (real GFCF), or real imports. To understand changes in Canadians' ability to consume and invest, it is necessary to look at changes in what that production can buy on world markets when relative prices change (most importantly the terms of trade) and the evolution of net income from abroad. When these effects are included with real GDP, a measure of real income referred to as real gross national income (GNI) can be derived.

Real GNI shows a shock from falling commodity prices many times larger than real GDP in the first quarter (Q1) of 2015, and one that starts earlier and lasts longer. The sources of growth for real GNI show that non-production sources of income, rather than changes in production, tended to be the major source of fluctuations from 2014 Q3 to 2016 Q3. Of these factors, the terms of trade was the most important.

Comparing real-GNI growth and real-GDP growth over the resource cycle illustrates that, while commodity prices fell to levels similar to those observed in the mid-2000s, the positive effect of commodity prices from the boom years were not completely unwound by the middle of 2016, suggesting that part of the gains appear permanent.

Finally, the non-production gains that constitute the difference between real GDP and real GNI are important for understanding the progression of real final consumption, real GFCF and real imports. The relative-price changes that resulted from rising, and then falling, commodity prices significantly influenced the progress of these variables. As economic theory would suggest, Canadians adjusted their consumption and investment to reflect the changes in relative prices. This adjustment was not accompanied by large changes in real GDP, but the relative importance of real GDP components, such as real consumption and real GFCF, did adapt.

References

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Macdonald, R. 2007. Real GDP and the Purchasing Power of Provincial Output. Economic Analysis Research Paper Series, no. 46. Statistics Canada Catalogue no. 11F0027M. Ottawa: Statistics Canada.

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Macdonald, R. A Long-run Version of the Bank of Canada Commodity Price Index, 1870 to 2014. Analytical Studies Branch Research Paper Series. Statistics Canada Catalogue no. 11F0019M. Ottawa: Statistics Canada. Forthcoming.

Morgan Stanley. 2013. Commodities Super-Cycle: Is It Coming To An End? Morgan Stanley Alternative Investments. New York: Morgan Stanley Smith Barney LLC. Available at: http://www.morganstanleyfa.com/public/facilityfiles/sb091208074535/1dbd5eb2-09ed-406b-88ee-2a347d9b1432.pdf (accessed August 10, 2016).

Poloz, S. 2015. Riding the Commodity Cycle: resources and the Canadian Economy. Remarks by Stephen S. Poloz to Calgary Economic Development, Calgary, September 21, 2015. Available at: http://www.bankofcanada.ca/2015/09/riding-commodity-cycle-resources-canadian-economy/ (accessed August 10, 2016).

Notes

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