Natural Resources, the Terms of Trade, and Real Income Growth in Canada: 1870 to 2010

Abstract

This paper studies the growth of the Canadian resource economy and the contribution of trading gains arising from increasing terms of trade to real income growth from 1870 to 2010. It combines a historical account of the growth of a succession of natural resources — examining both the production and price history of agriculture, forestry, mining, and oil and gas — with an overview of the impact of these developments on Canadian well-being. It uses estimates of the difference between real income and real output growth, based on measurement theory from the System of National Accounts, to measure trading gains that arose from increasing terms of trade over the period.From 1870 to 2010, the cumulative growth in the volume of real gross national income (GNI) due to trading gains is 18% larger than the more common measure of production, gross domestic product (GDP). The pattern is one of a long, initial period of positive growth in the gap between real GNI and real GDP from 1870 to 1920. This was followed by spurts of growth associated with the two world wars that were partly, but not fully, offset by subsequent reversals. The 1970s and the post-2000 petroleum and resource boom continued the long-term trend of an increasing differential between real GNI and real GDP.