Is Canada Really at Parity With the United States?

Measuring standard of living is always a complex and controversial issue. The highest profile, most accepted measure is GDP per capita measured at purchasing power parity. It is this calculation that has been yielding the 85% comparison noted above. From this standard measure we conclude that in 2007, the typical Canadian can purchase about 86% of the goods and services as the typical American. How has this changed with the par dollar?

While parity means that spending power per dollar is roughly equivalent, this is not the whole story of standard of living. To have a reasonable indication of the impact of the appreciation of the Canadian dollar on the standard of living, we must consider how much the typical Canadian will earn in 2007, and then what can be purchased in Canada with these dollars.

Our standard of living has not reached the American level for several reasons. First, the price level is higher in Canada; a Canadian dollar cannot buy as much in real goods and services in Canada as a U.S. dollar can in the United States. While measures of differences in the price level are not precise, and this difference is likely shrinking from week to week right now, the gap is currently probably in the 15–25% range. Global Insight's most recent measure of purchasing power parity is about 84 cents, implying a price level difference of about 16%. Canadian nominal GDP (NGDP) per person, when allowance is made for purchasing power parity (that is, the difference in price levels), will be the equivalent of about US$39,100 in 2007, compared with US$45,600 in the United States. This is an indication of the total purchasing power of the typical Canadian relative to the typical American, including funds available to be taxed to provide schools, roads, health care, and other government-provided services. This is the current standard-of-living gap of 16% noted above.

Not only is the price level lower in the United States, but the typical Canadian does not earn as much income as the typical American. In home currencies, NGDP per capita is about the same in Canada as in the United States, but personal incomes per capita are almost 10% lower (C$35,200 in 2007, versus US$38,400). This reflects particularly how Canadian NGDP is boosted by resource prices, which generate significant revenues for governments as well as corporate profits. Partly for this reason, but also partly because of Canadians' relative support of "tax and spend" governments, our government sector is relatively larger than the U.S. government sector, leaving relatively more room for personal income in the United States.

Turning to consumer expenditure, the typical Canadian will spend about C$25,800 this year while the typical American will spend about US$32,100. In addition, one U.S. dollar buys more in the United States than one Canadian dollar buys in Canada. One of the main reasons the gap for consumer expenditure is greater (20%) than the gap for personal income (10%) is taxes: U.S. governments take less out of paychecks than the Canadian governments do. This is especially true for those Canadian families of average and above-average income levels. While Canadian governments collect C$17,300 per capita from us, U.S. governments collected US$13,500 from their citizens.

The conclusion from these calculations is that, by the most meaningful measure of standard of living, there is still a significant gap between the real goods and services (including government-provided) that the typical Canadian can afford, relative to the typical American. With the Canadian dollar rising to par, over time, this will be reflected in lower consumer prices in Canada and higher prices in the United States. Competitive pressures will narrow the current roughly 16% gap in price levels.

Unfortunately, the loonie rising to par has not resulted in a significant increase in Canadian wages and salaries up to U.S. levels, nor will it. It will only mean lower prices for some traded goods in Canada as competition forces pass through over time. Most services are not traded, and some goods are not imported from, nor competitive with, the United States, so we will not see a decline in these prices. Moreover, while the Canadian dollar has gained significantly on the U.S. dollar recently, its gains over the euro, the British pound, and several other major currencies are more modest.

Currently, the stronger loonie is most beneficial to Canadian consumers in the U.S. marketplace, where it can purchase more than it used to. Unfortunately, to get Canadian incomes up to U.S. levels we need to do it the hard way: by increasing our productivity to U.S. levels. We then need to convince our politicians to permit us to take home more of it, before we will have the purchasing power of the typical American consumer.