This builds off an earlier post about the terms of trade, trading gains, and Gross Domestic Income and it extends the analysis to the provincial level. It's probably a good idea to take a look at it before continuing on. Okay, welcome back. I'm going to reproduce a key bit of that other post: My guide is Section 7.6 of this Statistics Canada explainer, and equations (7.20) and (7.21) in particular: Real GDI = Real GDP + Trading Gain Trading Gain = (X-M)/P - (X/Px - M/Pm) where X and M are exports and imports with prices Px and Pm. P is some measure of prices for domestic expenditures, and apparently the choice is 'debatable'. I can see why, but I don't want to get into it, so I'm going to go along with Statistics Canada's choice of using the deflator for Gross Final Domestic
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This builds off an earlier post about the terms of trade, trading gains, and Gross Domestic Income and it extends the analysis to the provincial level. It's probably a good idea to take a look at it before continuing on.
My guide is Section 7.6 of this Statistics Canada explainer, and equations (7.20) and (7.21) in particular:
Real GDI = Real GDP + Trading Gain
Trading Gain = (X-M)/P - (X/Px - M/Pm)
where X and M are exports and imports with prices Px and Pm. P is some measure of prices for domestic expenditures, and apparently the choice is 'debatable'. I can see why, but I don't want to get into it, so I'm going to go along with Statistics Canada's choice of using the deflator for Gross Final Domestic Expenditures:
GFDE = GDP - (X-M)
This deflator is published as Cansim series v61992662...
There are a couple of things to note here.
- You can see how the terms of trade affect the trading gain. If Px goes up and/or Pm goes down, then the trading gain increases, ceteris paribus. An increase in Canada's terms of trade increases Canadians' purchasing power on the world markets.
- Since we're using price indices normalised to 100 in the reference period (2007, in this case), the trading gain in the reference period is always zero: all the price indices would be the same, so the (X-M) terms cancel out exactly.
Statistics Canada has since rebased their national accounts data to 2012, so it's time to update the charts in that earlier post. Because 2012 is the new reference year, the trading gains are now defined to be zero in 2012, and the trading gains in other years are the deviation from the gains in 2012.
First, the terms of trade - the ratio of export prices to import prices. You can see the drop in 2018:
And here are the trading gains. Again, the fact that these estimates are less than zero before 2007 does not mean that Canada's gains from trade were negative. It just means that they were less than they were in 2012. Canada's terms of trade were still very favourable in 2012, even if they were lower than they were in 2007, when they were in the stratosphere.
And here are the per capita trading gains. The 5% fall in the terms of trade has led to a reduction of 800 $2012 in the trading gains since 2018Q1, enough to undo most of the gains since the post-2015 rebound after the drop in oil prices in 2014.
And here's the comparison of real GDP and real GDI per capita. Again, because the trading gains are normalised to zero in the reference year. the two series intersect in 2012. You can see how the GDI story over the past 4 years is more discouraging than the per capita GDP story.
Now onto the provinces. Statistics Canada doesn't provide estimates for the terms of trade or for GDI at the provincial level, but we can calculate them from the annual provincial accounts data in Table 36-10-0222-01, which include data for trade with other provinces, with other countries as well as the total. Since Canada's terms of trade are driven by resource prices, and especially oil, the biggest swings in provincial terms of trade are in Newfoundland and Labrador, Saskatchewan and Alberta:
These swings are huge: increases on the order of 50%-70% during the resource boom, followed by decreases on 20%-30% since 2014. Here are the terms of trade in the other provinces, with the same y-axis scale as the chart above:
As you can see, the movements are much more muted in the non-resource provinces. You see a similar pattern in the trading gains:
Per capita gains during the boom were on the order of 15k-20k 2012 dollars, which is a pretty impressive number. Of course, that has to be set against the 10k 2012$ loss since 2014, and the 10k-15k 2012$ losses in the decades when resource prices were soft. In contrast, there is not much to be said about movements in trading gains in the other seven provinces since 1981:
We can dig a bit deeper, because the provincial accounts data break exports and imports down into their interprovincial and international components. This means that we can recover estimates for the trading gains associated with other provinces as well as with other countries. For the resource provinces, the movements in trading gains are pretty much driven by international trade.
There's not a lot of point in doing this exercise for all the provinces, but just in case you were wondering if the lack of movement in the total trading gains masked important changes in the components, that's not the case. There is no terms of trade or trading gains story to be told in the other seven provinces. Here are Ontario and Quebec, just as an illustration.
So the point to take from this exercise is that the swings in resource prices (basically oil) have produced changes in Canada's trading gains - the difference between GDI and GDP - but these swings only happened in the three resource provinces: Newfoundland and Labrador, Saskatchewan and Alberta. The trading gains in the other provinces appear to be almost completely insulated from the changes in oil prices; the trading gains have remained flat throughout. I think this is somewhat surprising; I was expecting to see a deterioration in the non-resource provinces' terms of trade during the oil boom, but that didn't seem to happen.
I'm going to have to revisit the question of how oil price shocks propagate across Canada.