Canadian and U.S. Real Income Growth Pre and Post 2000: A Reversal of Fortunes
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by Ryan Macdonald
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Evaluations of an economy's economic performance are often made using a measure of real gross domestic product (GDP) per capita, which represents the average remuneration (labour income plus capital services) that an economy generates through domestic production.
Because real GDP is a constant dollar measure of the remuneration to capital and labour in an economy, it does not account for who owns the capital, how much of it is used up through production or how relative price shifts affect the volume of goods and services that can be purchased.
Modifications can be made to traditional estimates of GDP to account for these factors. This paper examines the performance of the Canadian economy using alternate measures — gross domestic income, gross national income and net national income. The paper also examines the relative performance of the Canadian and U.S. economies using standard GDP measures and these alternate measures.
The comparison spans the period from 1980 to 2006, but focuses on the 2002-to-2006 period. During these latter years, changes in commodity prices, manufactured goods prices, the exchange rate, international investment income and capital consumption have all contributed importantly to real income growth in Canada.
As a result, a very different picture of relative performance of the Canadian and U.S. economies emerges when an aggregate income measure is used that accounts for relative price changes, international income flows and capital consumption than when real GDP is used. From 2002 to 2006, U.S. real GDP per capita grew 9.3% while Canadian GDP per capita rose 7.0%, making it appear that the U.S. economy was outperforming the Canadian economy. However, once changes in resource prices and the exchange rate, international investment income and capital consumption are taken into account, real income per capita in the United States increased by 8.6%, which is similar to its GDP per capita growth. However, the Canadian adjusted measure of real income per capita growth rose 15.6%, more than twice the per capita real GDP growth in Canada and nearly double the U.S. rate.
In contrast, the difference between the two economies was exactly the opposite in the period from 1980 to 2000 — when commodity prices were falling, when the exchange rate was not appreciating and when outward flows of income to foreigners were increasing relative to the income paid to Canadians. During this period, when consideration is given to these factors, real income measures in Canada were falling relative to those in the United States.
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