Setting productivity in perspective²¹

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Summary statistics relating to productivity indicate how efficiently an economy is transforming its inputs into output. But they are far from comprehensive in terms of delineating how well off Canadians are.

Evaluations of an economy's productivity performance are made using a measure of real gross domestic product (GDP), which represents the constant dollar income (labour income plus profits) that an economy generates through domestic production, with the volume or constant dollar indices being calculated from the prices of domestic goods and services produced.

This measure does not account for who receives the income (domestic or foreign residents), how much capital is used up through production or how relative price shifts of exports versus imports (terms of trade) affect the volume of goods and services that can be purchased with the income.

Modifications can be made to traditional estimates of GDP to account for these factors. The performance of the Canadian economy can also be examined using the resulting alternate measures—gross domestic income (GDI), gross national income (GNI) and net national income (NNI).

When the concept of real income is widened to include changes in the purchasing power of earned income, the relevant measure is real gross domestic income (GDI). Changes in purchasing power come from changes in relative prices of exports and imports—one of which is the terms of trade.

Real GDI is a constant dollar measure of the purchasing power of income generated by domestic production in Canada, taking into account changes in the relative levels of import and export prices. However, Canadians invest abroad and foreigners invest in Canada. As a result, not all of the incomes earned in Canada accrue to Canadians, and some of the income earned in other countries is owed to Canadians. When these international income flows are combined with real GDI, the resultant real income aggregate is real gross national income (GNI).

Finally, subtracting capital depreciation leads to real NNI. Real NNI captures the purchasing power of real income retained by residents of Canada after they have replaced worn out and obsolete physical capital. It is the purchasing-power-adjusted real income distributed to Canadians after ensuring the maintenance of the domestic capital stock of machinery and equipment, buildings and infrastructure.

For purposes of comparison, measures of real GDP per capita and real NNI per capita in Canada relative to the United States are presented in Figure 12. In real terms, the Canadian economy lagged behind the U.S. economy prior to 2000, as relative GDP per capita fell about 10 percentage points over the 1980s, levelled off in the 1990s and then increased slightly after 2000. Relative productivity also declined prior to 2000—falling in the 1980s, holding steady in the 1990s and then declining precipitously after 2000. The difference between GDP and productivity growth after 2000 occurred because the Canadian labour market was much more buoyant than the U.S. labour market. Hours worked per capita increased more rapidly in Canada than in the United States—driven by a much larger increase in number of jobs per capita.²²

Figure 12
Economic performance of Canada relative to the United States¹

Declining relative prices for commodities and the depreciation of the dollar take a further toll on the measure of Canadian real NNI per capita compared to the United States, leading to a more noticeable decline in real NNI during the 1980s than relative GDP. Prior to 1990, relative income falls more than relative GDP. The real income measure reveals an even greater gap in the performance of the two economies

In the period before 2002, all of the measures indicate a long-term decline in the relative performance of the Canadian economy—though the various modified income measures decline more than the relative GDP per capita measure, especially in the 1980s. These were the years in which the resource economy in Canada was in decline. Resource inputs as a percentage of GDP were falling around the world. Relative commodity prices were declining. Canadians were increasingly remitting more abroad than they were receiving. As a result, the various income measures actually declined more than the measures of GDP.

All that has changed with the commodity boom that Canada has experienced after 2000. Prices of exports have increased dramatically relative to the prices of imports. Canadian receipts of income from abroad have increased dramatically relative to payments abroad. The concatenation of these events has led to a dramatic increase in real income growth in Canada relative to its GDP growth. And this also has affected Canada–United States comparisons. Canada had a strong terms-of-trade improvement from 2002 to 2006, due to rising commodity prices, an appreciating currency and falling world prices for manufactured goods that contributed greatly to real income growth. The U.S. measures of real income were much less affected by trading gains.

As a result, comparisons of the relative per capita performance of the two countries hinges crucially on whether or not the terms of trade and international income flows are incorporated into the analysis. If the terms of trade are excluded, and relative real GDP per capita growth (or relative productivity growth) is the focus, Canada appears to be performing worse than the United States from 2002 to 2006. From 2002 to 2006, U.S. real GDP per capita grows 9.3% while Canadian GDP per capita rises 7.0%, making it appear that the U.S. economy is outperforming the Canadian economy. 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 increases by 8.6%, which is similar to its GDP per capita growth. However, the Canadian adjusted measure of real income per capita growth rises 15.6%, more than twice the per capita real GDP growth in Canada and nearly double the U.S. rate.

 

21. For further discussion of this issue, see Macdonald 2007.

^22. See Maynard 2007a.