Executive summary

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The System of National Accounts (SNA 1993/2008) outlines a number of alternative measures of aggregate output and income that can be used to represent economy-wide economic activity. In practice, most analysts emphasize measures of gross domestic product (GDP)—a measure of aggregate production in the economy.

Alternate measures outlined in the SNA 1993/2008 manuals include real gross national income (GNI) and gross domestic income (GDI). These measures of potential purchases or real absorption differ from real GDP in that they take into account real income gains from sources other than production, primarily the effect of changing terms of trade. In some countries and time periods, the measures of real GDI, real GNI and real production are sufficiently similar that attention tends to focus on only one measure. In Canada, real GDP tends to be the most commonly used. During the post-2000 resource boom, however, Canada's terms of trade changed dramatically and the real GDI, real GNI and real production measures diverged substantially (Baldwin and Macdonald, 2010).

This paper goes beyond the post-2000 resource boom and examines whether there were other times when the summary real income measures yielded different profiles of growth than did output measures. It does so by examining the differences in the two types of measures back to the period just after Confederation. The paper illustrates the usefulness of alternate measures of economic activity, that is, those that take into account non-production sources of real income growth (such as the terms of trade that influence the purchasing power of Canadian income generated by the production process or the flow of primary incomes through the current account). Over long periods of time, real income measures have grown more than the real gross real value added produced in the Canadian economy (real GDP).

The portrait of the extra growth that the non-production sources have generated for measures of Canadian real income is impressive. Since Confederation, the cumulative growth in the volume of national income (real GNI) is 18% larger by 2010 than the more common measure of production, real GDP. The pattern is one of a long initial period of positive growth in the gap between real GNI and real GDP from 1870 to 1920. This was followed by growth spurts associated with the two world wars that were partly but not fully offset by subsequent reversals. More recently, the 1970s and the post-2000 petroleum and resource boom further widened the differential between real GNI and real GDP.

These results also speak to the long-standing debate about the benefits of Canada's resource economy to overall economic well-being. Finding ways to directly measure the connection between an economy's emphasis on resources and overall economic well-being has provided a challenge to much of the discussion about the benefits of resource-based economies. The major source of growth differences between real GNI and real GDP for Canada is the behaviour of its terms of trade. In turn, the behaviour of Canada's terms of trade is directly linked to the relative price of resources. This paper sheds light on how long-run trends in the terms of trade associated with resource dependence have affected Canada's economic growth.

This paper pays close attention to one aspect of this debate: how the terms of trade between Canada's imports and its exports, which have been comprised of mainly natural resources or processed resources, have affected Canadian real income. The study examines the evidence of movements in the terms of trade and how they influenced differences between changes in real income and changes in real GDP.

The paper initially focuses on the evolution of successive waves of resource development and the prices of individual products that make up the terms of trade. Since 1870, a succession of resources has fuelled economic development: agricultural and animal products; forestry (logs, timber, lumber and pulp and paper); non-ferrous metals (zinc, copper, lead, nickel and gold) as well as iron ore, uranium and diamonds; electricity; and petroleum and natural gas.

The paper then moves beyond the richness of historical detail to make use of a summary statistic that cumulates the individual series at the aggregate level to evaluate the overall effect of changes in the terms of trade on well-being. It does so using standard measures arising from the SNA, notably real GNI, to demonstrate that the effect has been substantial.

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