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Tuesday, February 15, 2005

Study: Do prices charged by manufacturers in Canada and the United States move together over time?

Manufacturers' prices in Canada track those in the United States closely, but not perfectly, over the long run, according to a new study that examined 84 industries in both nations.

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The study used a detailed industry-level data base of industry prices in the manufacturing sector of both countries to investigate whether the prices for Canadian and US products move together, or alternatively, whether differences in the prices of products which are "matched" (in the sense of being produced by similar industries, albeit in different countries) exist and persist over time. This issue is of practical importance, affecting among other things comparisons of productivity or economic growth between the two countries.

Trade agreements have increased the degree of economic integration between Canada and the United States during the last 40 years.

One measure of the impact of economic integration is the extent to which identical products sell for the same common-currency price in each country, thereby obeying the so-called "law of one price."


Note to readers

Data for this study comes from NBER-CES productivity database and the KLEMS databases developed at the Micro-economic Analysis Division of Statistics Canada.


The study investigated how Canadian prices responded to US prices that are expressed in Canadian dollars, that is, adjusted for the exchange rate. Is, say, a doubling of Canadian prices matched by a doubling of US prices when those prices are expressed in common currency terms?

Based on data from 84 manufacturing industries from 1961 to 1996, the study finds that average Canadian manufacturing prices do not match US prices (expressed in Canadian dollars) in the short run. Price differences exist and fluctuate over time and reflect shifts in the exchange rate.

Such a conclusion is supported by the relationship between fluctuations in the ratio of the average price of Canadian manufacturing output to that of US manufacturing output (both expressed in Canadian dollar terms) and movements in the exchange rate. Fluctuations of the former around a value of one represent changes in relative prices and mirror exchange rate movements almost exactly.

It is also apparent that average Canadian manufacturing prices move in line with their US counterparts in the long run, as evidenced by the tendency of the relative price ratio to return to a value of one (rather than diverging) over time.

Although Canadian and US prices moved together in the long run, the magnitude of the relationship was not one-to-one, especially at the industry level. Many individual industries deviated from it.

The study found that as the degree of product substitutability and market integration increased, the correlation between Canadian and American prices also become stronger. Although there is little movement (relative to the prices charged by their US counterparts) in the prices charged by industries with less differentiated products and more integrated markets, this is not the case for all industries.

For example there are substantial upward movements in the Canadian price relative to the US price in industries such as the dairy products industry, the brewery products industry, the record player/radio and television receiver industry, and the communication and other electronic equipment industry. In other instances, there are substantial downward movements in Canadian prices relative to their US counterparts (e.g., in the steel pipe and tube industry, the copper and alloy rolling, casting and extruding industry, and the motor vehicle parts and accessories industry).

The research paper Integration and Co-integration: Do Canada–US Manufacturing Prices Obey the "Law of One Price?" no. 29 (11F0027MIE2005029, free) is now available online. From the Our products and services page, under Browse our Internet publications, choose Free, then National Accounts.

More studies on international trade can be found at Update on Economic Analysis on our Web site (11-623-XIE, free).

For more information, or to enquire about the concepts, methods or data quality of this release, contact Paul Warren (613-951-3999) or Beiling Yan (613-951-1234), Micro-economic Analysis Division.



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Date Modified: 2005-02-15 Important Notices