Study: Comparing Canadian and US price levels

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Canada and the United States share one of the longest borders in the world, their economies are intertwined, and trade between them is extensive. Consequently, Canadian consumers have a widely held expectation that the prices they pay for many products should be roughly equal to US prices, after adjusting for the exchange rate.

Two studies released today examine comparative price levels between the two countries.

The study "Do Relative Canada/U.S. Prices Equate to the Exchange Rate?" analyses the extent to which relative differences in prices between the two countries have reflected the market exchange rate over the last 40 years. It is based on concepts and methods from the Purchasing Power Parity Program.

The second study, "New Evidence on Exchange-rate-adjusted Prices in Canada," examines the Canada–United States comparative price level. This is defined as the ratio of the final selling price in Canada to the final selling price in the United States, adjusted for differences in the exchange rate.

These studies show that prices in the two countries generally do not equate. Nor do relative prices in the two remain constant when there are large movements in the exchange rate.

In recent decades, there has been variation in relative prices paid by Canadian consumers. When the Canadian dollar depreciated relative to the US dollar in the 1990s and early 2000s, prices paid by Canadian consumers did not increase in step with the higher costs of imported products.

By the late 1990s, median relative prices paid for goods in Canada, adjusted for the exchange rate, fell to near or below the US price levels. Relative price levels in Canada then reversed course in ensuing years as the Canadian dollar strengthened. However, the relative prices paid for tradable products in Canada did not decline sufficiently to fully adjust for changes in the exchange rate.

Hence, in relation to prices in the United States, Canadians tend to pay relatively less when the Canadian dollar devalues, and relatively more when it appreciates.

The studies found that since 1970, movements in the market exchange rate and the purchasing power parity exchange rate have been similar but not identical.

In the short term, market exchange rates and purchasing power parity exchange rates can diverge considerably. The short-term responses of a market exchange rate mean that the purchasing power of the two nations will rarely equate.

Moreover, the purchasing power parity exchange rate is based on a large group of products and services. Therefore, during periods where the market exchange rate may, on average, equate purchasing power, the prices of the individual products and services or small groups of products and services need not be equal.

Note: Tabulations in these papers are derived from a database that comes from Statistics Canada's Purchasing Power Parity Program. This is used to produce price comparisons between Canada and the United States at an aggregate level. Results in these studies used detailed price information on commodity groups, a cross-section of goods and services for industries mainly in the private sector.

The articles "Do Relative Canada/U.S. Prices Equate to the Exchange Rate?" (11-626-X2012003, free) and "New Evidence on Exchange-rate-adjusted Prices in Canada" (11-626-X2012002, free) are now available in the publication Economic Insights from the Key resource module of our website under Publications.

Similar studies from the Economic Analysis Division are available online (www.statcan.gc.ca/economicanalysis).

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588) or Ryan Macdonald (613-951-5687), Economic Analysis Division.