Commodity Boom, Plummeting Import Prices Drive Canadian Income Gains

(CEP News – Sean McKibbon)

As commodity prices rose and import prices fell between 2003 and 2007, Canada saw unprecedented, countrywide gains in purchasing power, a new report from Statistics Canada says.

“During this five-year period, real gross domestic income (GDI) per capita in Canada, increased at an annual average rate of 2.9%. At the same time, real gross domestic product (GDP) per capita rose at an annual average rate of 1.7%,” the statistical agency reported Tuesday. Every province except Prince Edward Island and Ontario saw GDI gains outstrip GDP growth.

“The combination of falling import prices and rising commodity export prices led to a widespread sharing of benefits from terms of trade improvements across Canada, something that had not occurred in the last 25 years,” the report said.

For most provinces, the decline in import prices was more of a contributor to terms of trade improvements than the increase in export prices, Statistics Canada said. Canadian import prices dropped on average 2.6% per year in the period, while export prices rose about 1% per year.

In Ontario, export prices fell more slowly than import prices. Prince Edward Island’s terms of trade worsened as export prices fell and import prices grew.

Quebec, Manitoba, Alberta and British Columbia saw export prices rise, while import prices fell. In Newfoundland and Labrador, Nova Scotia, New Brunswick and Saskatchewan, export prices grew faster than import prices, leading to terms of trade improvements, Statistics Canada said.

“While individual provinces experienced differing import and export price changes, the impact has generally been the same, improved terms of trade. In the case of Newfoundland and Labrador, the terms of trade driven trading gain accounted for 5.6 percentage points of the 9.5% average annual growth in real GDI per capita from 2003 to 2007,” Statistics Canada reported.

The report sounds a warning note, saying that although swift declines in oil prices hurt oil-producing provinces, that deterioration was offset by terms of trade improvements in oil importing provinces. But in this most recent commodities boom, trading gains were an important source of real income growth for most provinces, Statistics Canada said.

Commodities dominated the exports of a number of provinces. On average, from 2003 to 2007, energy products in Newfoundland and Labrador accounted for 69.4% of exports by value. Prince Edward Island’s agriculture and fishing products accounted for 68% of its exports. In Alberta, energy commodities accounted for 69% of exports, while, in British Columbia, 40.5% of exports were forestry products.

[The research paper The resource boom: Impacts on provincial purchasing power is available in the Insights on the Canadian Economy Research Paper Series (11-624-MIE2008021, free) on the Statistics Canada website.]