We Are Not Slower, Just More Erratic: Comparing Growth in Canada and the United States

The existence of a productivity gap between Canada and the United States should ultimately manifest itself in terms of the growth rate of real per capita GDP.  If productivity growth in Canada is consistently below that of the United States, then our real per capita GDP should also not grow as quickly as the United States.  Yet, the historical evidence shows that the real per capita GDP growth rate in Canada has not necessarily underperformed the United States since 1870. However, there is an interesting differential performance across time periods.

I’ve used real per capita GDP in $2009 for the United States from EH.Net and real per capita GDP in $2002 for Canada using the Urquhart-Green GDP data and data from Statistics Canada (see a previous post).  For the period 1870 to 2012, real per capita GDP in Canada grew at an annual average rate of 2.3 percent.  For the United States, it grew at 2.1 percent.  This was not what I was expecting. Yet this higher growth rate is primarily the result of some very high and more variable past growth rates. 

Figure 1 presents average annual real per capita GDP growth by decade starting from the 1870s for both countries and the comparison shows that while the United States has been doing better than Canada since the 1980s we did better from the 1950s to the 1970s.  The United States appears to have done better than Canada during both the Great Depression and the 1940s while Canada saw higher growth during the roaring twenties.   We also did better during the period of the Wheat Boom during the 1890s and 1900s. Indeed, the 1900s and the 1920s saw some very high average growth rates for Canada relative to the United States.

What is interesting is the variation in our growth rates.   Over the period 1870 to 2012, the coefficient of variation (standard deviation divided by the mean) for real per capita GDP growth across the two countries is 2.65 for Canada and 2.37 for the United States.  Our annual real per capita GDP growth rates are more dispersed. As might be expected in comparing a small open economy that is more reliant on natural resources, our economic growth is more subject to boom and bust than an economy that is more diversified and more reliant on a large internal market. 

Notwithstanding the recent productivity gap of the last few decades, I would venture that the traditional perception of Canada as a lower productivity growth country relative to the United States is flawed.  We simply have had a more variable growth rate as a result of our economic structure.  We are a high flyer who is more often caught up in bouts of turbulence.

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Comments

[Min]

Just checking.

Real per capita Canadian GDP in 2012 was 25 times what it was in 1870 (1.023^142), and real per capita US GDP in 2012 was 19 times what it was in 1870 (1.021^142).

A surprising number of economists take the arithmetic mean of growth rates instead of the geometric mean. That's OK when you are only talking a couple of years, since the error is small. But for 142 years the error can be huge.

Sorry to express doubt, but I have yet to find an economist using the geometric mean in a blog.

[Livio Di Matteo]

Min:
Fair enough. If you calculate the geometric mean (or compound annual growth rate) between the starting and ending values of real per capita GDP in 1870 and 2012 you get a growth rate of 2.1 percent for Canada and 2.0 percent for the US.

[Min]

Many thanks. :)

So that's a factor of 19 for Canada and 17 for the US. :)

[Nick Rowe]

Interesting, Livio.

One very simple explanation: Canada is a smaller country than the US, so the Law of Large Numbers does not kick in as strongly to smooth things out.

[W. Peden]

It's interesting that my knee-jerk explanation (that Canada has a more commodity-based economy) doesn't actually help e.g. the 1960s were a better decade for Canadian growth than the 1970s or 1980s when commodity prices were doing very well.

Is the Canadian economy less diversified?

Nick Rowe,

It would be interesting to see that tested by comparing the instability of the Canadian economy to other similarly-sized economies and also even smaller economies.

[Determinant]

Is the Canadian economy less diversified?

Yes, just take a look at the Canadian securities market. It's a mixed bag of natural resource plays and financial firms, and the rest is negligible. Nortel was one of the few manufacturing stocks of any significance on the TSE.

The 1960's was the golden age of Canadian (read: Ontario, and to a lesser extent, Quebec) manufacturing. Cheap resources, cheap power and a young and growing labour force. The Baby Boom was in full swing and Canadian mothers had 4.0 children on average (3.8 in the US). Quebec mothers were a large part of this fact (the "Victory of the Cradle").

[Jon]

If there is more volitility, there should be more volatility drag. If there is then, given equal average growth rates, cagr will be lower in Canada than the US.