The Output Gap between Canada and the United States : The Role of Productivity (1994-2002)

Comparisons of Canada’s economy to that of the United States are done for several purposes. On the one hand, analysts are interested in whether there is an output gap between the two countries — whether Canada is as well off as the United States in terms of the quantities of goods and services that are produced, taking into account the relative size of the two countries. On the other hand, analysts ask whether there is a productivity gap — whether Canada is equally efficient in transforming the resources used in the production process into goods and services. Determining the answers to both these questions is complex because of the size and diversity of the two economies. The Canadian and U.S. economies produce a variety of goods and services and intercountry comparisons require the creation of a single (or a small) number of summary statistics that encapsulate differences between the two countries. In this paper, we use two separate but related measures to investigate the size of the output and productivity gaps between the two countries over the period from 1994 to 2002 and ask how they are related. We do so in order not only to describe the differences between Canada and the United States but also to ask whether the two measures provide the same story. We show that they do not and explain why