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Following prices in Canada and the United States

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Ever wonder why, even after adjusting for the exchange rate, many products are considerably cheaper in the United States than in Canada? You wouldn't be the first. It has puzzled many of us, from the cross-border shoppers in the early 1990s to today's Internet bargain hunters.

With our two economies increasingly integrated, shouldn't the prices for similar manufactured goods be about the same in both countries? Well, yes-but we often have to wait a while before seeing it.

An examination of manufactured goods from 1961 to 1996 shows that while prices charged by manufacturers in Canada and the United States (adjusted for exchange rates) do follow each other closely, they tend to do so only over the long run.

Chart: Canadian price relative to U.S price expressed in Canadian dollars, manufacturing average (1961=1.00)Over the shorter term, we pay different prices because of factors such as fluctuations in the exchange rate, the intensity of domestic market competition, or different levels of productivity in our two countries.

Moreover, not all prices react the same way. For example, over the long term, Canadian prices for dairy products, televisions, communications gear and electronic equipment tend to move upward against U.S. prices. On the other hand, Canadian prices tend to decrease against U.S. prices for goods such as steel pipes and tubing, copper products, and motor vehicle parts and accessories.

However, trade agreements have increased the degree of economic integration between Canada and the United States, so we have been seeing average prices gradually come closer together. They do not, however, tend to equalize.