Professor Henry Srebrnik

Professor Henry Srebrnik

Thursday, November 01, 2007

The Loonie versus the U.S. dollar

Henry Srebrnik, [Charlottetown, PEI] Guardian

Though Canadian retail prices are starting to reflect the impact of our stronger dollar, many economists think they will always remain higher than their American counterparts.

Why? It's due to the higher cost of doing business in this country. Our different tax structures, tariffs, higher wages, more regulations, plus some minor costs, such as bilingual packaging requirements, all make goods here more expensive.

Also, Canadian retailers pay more because the market is one-tenth the size of the United States, according to Diane Brisebois, president of the Retail Council of Canada.

"We don't suspect that the price differentiation will disappear ever, and that is simply based on economies of scale," she said recently. "If you buy a dozen doughnuts you get a better price than if you're buying a single."

Therefore, identical items are often priced at least 20 per cent higher in Canada than in the U.S. - and in many cases, a lot more than that.

So, ironically, our high-flying loonie, now trading at over US$1.03, can buy more in the U.S. than here, and Canadians have to cross the border to get a better price on the same products that are available at home.

That's because a Canadian dollar cannot buy as much in real goods and services in Canada as a U.S. dollar can in the United States. As opposed to the exchange rate, where the two currencies are now about equal, in terms of what is known as purchasing power parity (PPP), the loonie probably will buy only the equivalent of about 85 American cents.

In other words, we need to spend one Canadian dollar here to buy the same bundle of goods that cost Americans 85 cents in their country.

(By the way, when our dollar was in the low 70 cents US range, it was undervalued, because then, too, the two currencies were much closer in terms of PPP than was true of the exchange rate at that time.)

Also, not only are prices lower in the United States, but the typical Canadian does not earn as much income as the typical American, and gives more of it away in taxes. Canadian governments collect C$17,300 per capita from us, while American ones collect US$13,500 from theirs.

So why is the loonie 'punching above its weight'? The dramatic rise of the currency is due mainly to world commodity prices, in particular oil; our resource sector accounts for more than one-third of Canada's exports.

But the standard of living of average Canadians remains lower than that of our neighbours. Perhaps a new definition of a Canadian is someone who spends $10,000 more on a car than does an American, so they can wait two years for a hip replacement.