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June 28, 2017TRADE GAINS: PROVINCIAL SUMMARY, 2015 Trade Gain
Trade gain is a measure of the contribution of the terms of trade and the real exchange rate to growth in real gross domestic income (rGDI). Trade gain measures changes in the (provinces’) terms of trade, and the real exchange rate. Sometimes these elements work in concert, sometimes in opposition.
The terms of trade is a component of trade gain. By definition, changes in the terms of trade directly impact the purchasing power of domestic production. A change in the terms of trade is not a change in GDP, but it is a leading indicator of change in GDP.
In our model, the terms of trade is the ratio of indices of export and import prices. The evolution of a country's balance of external trade depends not only on changes in the volume of goods and services exported and imported but also on the prices at which they are traded. Thus, the ratio of export to import prices -- "the terms of trade", determines the volume of exports necessary to pay for a given volume of imports or, analogously, the volume of imports which can be purchased with the proceeds of a given volume of exports. Other things being equal, if the price of exports falls relative to that of imports (a fall in the terms of trade), the trade balance will deteriorate, and vice versa.
Changes in the terms of trade are the result of price changes in the international market, while changes in foreign exchange measures changes between the foreign and domestic prices.
The other component contributing to the growth of real gross domestic income (rGDI) is the growth iin real gross domestic product (rGDP).
Provinces
In the other provinces 2015, purchasing power index (rGDI) growth ranged from +2.1% (Ontario and British Columbia) to -12.5% (Alberta). Real gross domestic product’s contribution to rGDI growth ranged from +3.273 percentage points (British Columbia) to -3.665 percentage points (Alberta). Trading gain contribution to rGDI growth ranged from +6.320 percentage points (Saskatchewan) to -8.838 percentage points (Alberta).
In the other provinces 2007-2015, (over the entire period) purchasing power index (rGDI) growth ranged from +20.1% (Saskatchewan, 2008) to -19.8% (Newfoundland, 2009). Real gross domestic product’s contribution to rGDI growth ranged from +10.675 percentage points (Newfoundland, 2007) to -10.637 percentage points (Newfoundland, 2009). Trading gain contribution to rGDI growth ranged from +14.999 percentage points (Saskatchewan, 2008) to -11.264 percentage points (Alberta, 2009).
PURCHASING POWER
In the figures, a positive trade gain is shown as blue. In Saskatchewan, a trade gain was realized over the entire 2007 to 2015 period. rGDI exceeded rGDP. In Prince Edward Island and Newfoundland, a positive trade gain occurs over most of the period starting in 2009 through to 2015. Note that terms of trade index (2007=100) typically exceeds the rGDP index (2007=100) over all or most of the period. This indicates a gain in purchasing power relative to 2007.
In the following figures, a negative trade gain is shown as pink. Nova Scotia, Manitoba and British Columbia illustrate this case through 2008 to 2015. Note that the terms of trade index falls below the rGDI index over most or all the period. This indicates a loss in purchasing power.
In the following gain or loss in purchasing power is ambiguous. Included are Alberta, Ontario, Quebec, New Brunswick and Canada.
RESULTS
In 2015 rGDI index (2007=100), in Saskatchewan was 124.6, and in Prince Edward Island was 115.8, ranking these provinces first and second in growth of rGDI. Growth in Saskatchewan trailed off in 2015 after reaching a provincial period high of 136.8 in 2013. Meanwhile, PEI showed steady, increasing growth in the rGDI index over the period. Growth in the rGDI index exceed growth in the rGDP index in both provinces, indicating a positive effect from trade gain.
Alberta scored well during the 2007-2015 period but the rGDI index fell off to 109.4 in 2015. The province’s terms of trade index growth did not perform well resulting in rGDI index growth barely matching the rGDP index growth. So, no benefit from trade gain.
Over the period of study, Nova Scotia also demonstrated increasing growth in the rGDI index, but at low percentage growth, relative to PEI. Overall rank in 2015 was eighth. Because growth in the rGDI index was less than growth in the rGDP index over most of the period, the impact from trade gain was negative.
A look at the performance of Newfoundland yields some interesting results. Over most of the period the province’s rGDI index increased faster than rGDP index because of the trade gain. In 2011, the contribution to the rGDI index from the terms of trade was 4.2% and the real exchange rate contribution to the rGDI index was 1.2% for a trade gain of 5.3%. Real GDP contribution to the rGDI index was only 2.8%.
In Ontario and Quebec, the results were similar to Alberta – negative trade gain due to declining terms of trade.
Computed from CANSIM Tables 380-0065 and 380-0101.
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