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the railway and the telegraph in the early 1800s. Over the years, a steady tide of technological progress has profoundly reshaped our economy, making possible the combustion engine, the assembly line, computer networks and professional consultants. Today, economic progress rides an electronic expressway of automation, information and instant communication. Advances in technology, the increased globalization of markets and the emergence of liberal trading regimes are fundamentally changing the way Canadians conduct their business. Long removed from an economy based almost exclusively on natural resources, Canada is rapidly moving toward a knowledge-based economy built on innovation and technology. The new economy is also a ‘smarter’ economy: Canada’s knowledge-intensive industries are generating advances in our ability to produce high-tech machinery and equipment, and encouraging industrial innovation as a result. Canadian businesses are ‘getting connected’ more than ever before, exploiting advances in communications technology to reach out into the global marketplace in search of buyers for their products. Though we have always been a nation looking outward for markets, Canadian trade continues to grow beyond our borders. Indeed, with a small domestic market, the steady expansion of multilateral trade is critical to the structure of our economy and the continued prosperity of our nation.

espite the transformations now rippling through the Canadian marketplace, the most dramatic structural change our economy has undergone is the rise of the services sector. Though our goods-producing industries account for 33% of our national economy, the Canadian services sector is much larger, employing three out of four Canadians and generating two-thirds of our gross domestic product.

What exactly makes up the Canadian services sector? It’s easy to picture the physical products churned out by our manufacturing, agriculture, mining, forestry and construction industries, but the value of the services sector is less tangible. Goods need to be delivered, and this involves storage services, truck drivers, rail carriers and bicycle couriers. The actual exchange of goods often requires legal and financial services to process the transactions. Canadians also want to shop, eat out, and be entertained by movies, operas, concerts and ballets. And nearly every aspect of government activity—from health care to education to national defence—is a service provided to Canadian citizens.

Just as a Canadian family counts its bills and income to get a picture of its economic health, economists measure a country’s expenditures and income. Gross domestic product (GDP) is a popular indicator used by countries to estimate the value of their economic activity. Measuring the total value of goods and services produced in a country during a given period, GDP includes everything from personal expenditures on food, clothing, rent, haircuts and movies to government expenditures on roads, military hardware, business investments and net exports (exports minus imports). It also accounts for the money companies spend on new factories or shopping malls. GDP does not, however, include transfer payments such as old age pensions, employment insurance and welfare payments. It also ignores the purchase of raw materials or intermediate goods and services used by businesses to produce final products purchased by consumers, thus measuring the value of production without any duplication.

GDP can also be measured by focussing on economic production. It measures the cost of production by the industry. GDP or value added can be obtained by subtracting from the total value of production the value of inputs purchased from other industries (intermediate inputs). Using net rather than gross outputs avoids double counting the output of one industry that is an intermediate input to another.

For Canada, 1999 marked the eighth consecutive year of economic growth, with our GDP at factor cost reaching $753 billion. After factoring out inflation, GDP grew by 4.3% in 1999.

This overall expansion was mirrored in nearly all facets of the Canadian economy. Manufacturing led the charge, growing at 6.3%, a reflection of the increased production of motor vehicles (22.4%), vehicle parts (13.6%), telecommunications equipment (35.7%) and computers and peripherals (27.4%). Together, these products accounted for over half the growth in output.

The services sector also grew in 1999—by 3.7%. Wholesale trade provided some of the thrust, growing at 6.7%, largely because of substantial sales of computers, computer software and other electronic machinery. A 7.8% growth rate in business services was propelled by a 23.3% gain in computer consulting and related services, much of which was likely influenced by the Year 2000 computer ‘bug’.

After stagnating in 1998, the construction sector rebounded in 1999, growing by about 4%. Construction was bolstered by significant increases in residential housing (5.8%) and non-residential building (4.8%). The modest 1.1% growth rate of the primary sector can be largely attributed to weak commodity markets, particularly for the mining, quarrying and oil well industries. Mining in Canada experienced a decline in real output in 1999, with metal mining falling 9.3%, crude oil and natural gas down 2.4% and drilling activities dropping 5.3%.

Canada’s continuing economic boom has rippled straight across the nation. The Ontario economy was robust in 1999 as manufacturing, retail trade and housing put up strong performances. The economy, especially the manufacturing sector, was also rigorous in Quebec in 1999, although the growth rate was below that of Ontario.

The Atlantic economy has been fuelled in recent years by construction megaprojects such as the Terra Nova offshore oil platform, off Sable Island, the Confederation Bridge and the expansion of a refinery in Saint John. Also buoying the economies of Newfoundland, New Brunswick, Nova Scotia and Prince Edward Island in 1999 was an increased foreign demand for food and wood products.

Although economic growth in 1999 was generally positive in the Prairies, the significant agricultural sector continued to struggle, largely because of weak grain prices. Farther west, the British Columbia economy surged ahead, posting gains in resource-based industries, especially in the second half of 1999. In particular, a strong American housing industry generated a healthy demand for wood products made by British Columbia’s forestry firms.

ven when the Canadian economy is chugging away and seemingly on auto-pilot, economists are constantly maintaining a lookout for symptoms of trouble, such as a dip in productivity or a loss in buying power. They measure the health of the economy, determine the long-term impacts of trends in the marketplace, and prescribe adjustments to ensure it remains balanced. A number of tools for giving the economy a ‘physical’ are at their disposal.



One effective barometer of an economy’s strength is the extent to which it operates at full capacity—its capacity utilization rate. This rate compares the potential output of any given industry or company with its actual output.

During the late 1990s, the sound of assembly lines churning out product after product all across Canada was certainly music to economists’ ears. In 1999, the average capacity utilization rate for all Canadian industries, excluding farm goods, was 84.9%. This rate was higher than at any other time in Canadian history, with the exception of the 1987–88 boom period.

As industries operating at full capacity reach their production limits, however, inflationary pressures can begin to emerge. The current boom in investment, especially for new machinery and equipment, should ease that pressure somewhat because it will allow producers to continue to expand their production lines and lower their prices through improvements in the efficiency of production.

Productivity is another useful indicator of economic health. Increases in productivity can reflect improvements in a number of critical areas of a modern economy, such as advanced production techniques or knowledge. Productivity also provides the foundation for improvements in a country’s standard of living. Wages and salaries grow when businesses become more efficient, and higher production efficiency also allows the prices of goods and services to drop. Increased productivity is also a sign of a highly skilled labour force, with more workers using machines to produce goods, and improved management practices.

Labour productivity—the measure of real GDP generated per hour of work—is a useful reading of the strength of our work force. Strong labour productivity can mean higher rewards for our workers. Since higher productivity lowers prices, better wages and living standards for all Canadians can emerge as a result. Bolstered by a jump in improvement in the manufacturing sector, labour productivity in 1999 grew 1.4%, almost three times the pace set one year before (0.5%). The productivity of workers increased 2.1% in the goods sector and 1% in the services sector.

Though not traditionally considered a high-tech industry, the agriculture sector in 1999 led in productivity, with an advance of 13.4%. Other substantial gains could be seen in forestry (7.2%), communications and other utility industries (6.8%), wholesale trade (5.2%) and mining (4.5%).

PPPs are conversion rates based on the real purchasing power of currencies—as opposed to the international market price of the currencies. One popular approach used to convert international currencies to their ‘correct’ exchange rate is the ‘Big Mac Index,’ calculated regularly by The Economist. This index equalizes the price of the McDonald’s hamburger in various countries. For example, in April 2000, a Big Mac cost US$2.51 in the United States and C$2.85 in Canada. The PPP value, or $2.51 divided by $2.85, was $0.88. Since the Canadian dollar was trading at US$0.68 at the time, based on the price of hamburgers, the Canadian dollar was worth 20 cents more than its open market exchange-rate value.

Based on a larger basket of goods, the Canadian dollar in 1998 had a PPP value of US$0.84, compared with its exchange rate of US$0.67. In other words, the Canadian dollar had a purchasing power value about 25% higher than the exchange rate suggested by the market.

This approach can also be used to compare GDP per capita figures among countries. In 1998, based on PPPs in Canadian dollars, Canadian GDP was $29,300 per capita, compared with $36,500 for the United States, $28,000 for Japan, $25,500 for France, $26,800 for Germany, $25,700 for the United Kingdom and $9,200 for Mexico.

hough we have always been a trading people, Canadians today are expanding their networks abroad more than ever before. The liberalization of trade through the World Trade Organization and the North American Free Trade Agreement (NAFTA) has reduced the costs associated with international trade, increased production runs and encouraged specialization. Moreover, the rapid diffusion of information and communication technologies has cut transportation costs and improved delivery times. Technological progress and productivity gains in the global marketplace have also lowered prices on many goods. As a result, Canadians are increasing an already strong reliance on international trade, particularly in North America.

NAFTA’s signatories are Canada, the United States and Mexico. To encourage trade among them, the agreement contains an ambitious schedule for the elimination of tariffs on goods and services being traded, as well as a reduction of other barriers to trade. The philosophy is simple: by eliminating some of the costs of doing business (namely, tariffs), firms are better able to realize their full potential by operating in a larger, more integrated and efficient North American economy. And as the effects of freer trade trickle through the economy, consumers generally benefit from heightened competition with better products, services and prices.

Though it is difficult to isolate the precise effects of any trade agreement on economic growth, NAFTA’s numbers are compelling: by the fifth anniversary of the agreement, Canada’s merchandise trade with the United States and Mexico had vaulted 80% and 100%, respectively. By 1999, trade in goods and services between Canada and the United States totalled $622.7 billion—an average of $1.7 billion of business crossing our border every single day. The dominance of the United States in our trade statistics is striking: all told, in 1998 the United States bought over four-fifths of our exports and produced three-quarters of our imports.

Our overall trade performance also remains impressive. Two-way trade in 1999 capped a decade of exceptional growth. Over the period 1990–99—during which our GDP grew at an average annual pace of 2.2%—exports of goods and services averaged 8% growth, while imports increased at a 7% clip.

Despite the overwhelming influence of the United States on our trade industry, Canadian goods also find their way to other corners of the world. Asia remains an important target, though exports to some Asian nations declined in 1999. On the other side of the world, sales to the European Union picked up moderately, as growth in the major western European economies firmed.

Just like any company’s books, the accounts must balance. If more money is leaving Canada than coming in, the balance of payments shows a deficit, and the difference needs to be financed. In other words, a current account deficit must be matched by an equivalent amount of foreign capital entering Canada or by borrowing from other countries.

Canada’s current account balance of payments was negative for most of the 1990s. However, in 1999 the current account deficit narrowed considerably from $16.3 billion in 1998 to $3.4 billion. This was the result of a $14.7 billion increase in the goods surplus from the previous year.

The balance of trade for merchandise is normally positive, since Canada traditionally sells more goods than it buys. This positive trade balance (surplus) for goods is due almost entirely to trade with the United States. The current account surplus with the United States reached an all-time high of $60.1 billion in 1999. The agriculture, fishing, energy, forestry and automotive sectors all continued to produce positive trade balances during the 1990s. Negative merchandise trade balances occurred in 1999 for machinery and equipment goods, as well as for industrial goods and consumer products.

ore than 1 million new jobs were created from 1994 to 1998. Employment growth was exceptionally strong in 1999, reflecting the sustained boom in the overall economy: in that year alone, 391,000 jobs were created. This growth was led by a resurgence in the manufacturing sector, particularly the computer and electronic parts industries.Growth in the number of full-time jobs was the driving force behind the surge in employment. About 383,000 full-time jobs and 8,000 part-time positions were created in 1999. Transportation services (especially trucking), warehousing and the trade sector posted gains in employment. The scientific and professional services industries also expanded, as Canadian businesses hired more technicians to upgrade their computer systems in advance of the ‘millennium bug.’ Employment in the primary industries suffered in 1999, however, from low commodity prices, particularly for agricultural goods.

In 1999, Alberta recorded job growth of 2.5%, New Brunswick 3.3%, and Ontario 3.6%. Newfoundland saw the largest relative increase, a 5.5% jump. Canada’s major metropolitan areas continued to lure job seekers, particularly in Ontario and Quebec; the strong economies in Toronto, Ottawa–Hull and Montréal were instrumental in driving new job creation in Central Canada.

Low grain prices and weak forestry and mining industries kept employment increases to a minimum in Manitoba and Saskatchewan. However, Alberta’s employment rate rose thanks to Calgary’s strong economy and an expansion of the province’s construction, management, administrative, professional, scientific and technical services industries. Rebounding commodity prices gave British Columbia a modest boost in employment in the second half of 1999.

The overall job growth in Canada drove the unemployment rate down to an average of 7.6% in 1999. The unemployment rate ranged from a high of 16.9% in Newfoundland to a low of 5.6% in Manitoba.

A new species of worker is beginning to leave its mark on the Canadian job market: the knowledge worker. Globalization, the increased specialization of trades and the diffusion of technology have made the knowledge worker an indispensable asset in our desire to modernize, innovate and ultimately expand the Canadian economy. With the requisite skills, training and education needed to participate effectively in high-tech industries, knowledge workers are finding themselves in great demand the world over.

These men and women normally possess a university degree or college diploma, and are distributed across a wide range of industries. For example, though computer services technicians can find employment in the computer services industry, the widespread use of computers makes their skills transferable to any number of industries such as engineering, wholesale trade, financial services, education, health and government services.

Canadian knowledge workers seem to find a particular niche, however, in the services industries. In 1996, nearly 61% of all science and technology workers were employed in the services sector. Of these, approximately 16% were attracted to health and social services, 11% to wholesale and retail trade, 8% to business services and 7% to government services.

The rise of the knowledge worker is having an impressive impact on the Canadian labour market. Since 1990, 1.8 million jobs have been created for people who are highly educated; over the same period, more than one million jobs for people with only a high school education or less have been lost.

The demand for highly skilled individuals reaches far beyond the Canadian border. As the rapid growth of knowledge-based industries continues, worldwide demand for skilled professional and technical workers has proliferated. Many Canadians are well able to compete for such jobs, where the criterion for employment is having a postsecondary degree or diploma. Half of the Canadian labour force between the ages of 25 and 64 has a postsecondary degree or diploma; in the United States only 37% of this group hold similar qualifications. Moreover, Canada has the highest postsecondary education enrollment in the world and the second-highest university graduation rate. Canada also ranks among the top G7 countries for spending on education.

Some Canadians are taking their degrees and heading south of the border in search of employment. Unemployment rates in Canadian science and engineering occupations in particular are double those of the United States, and earnings in these occupations are often much higher stateside. The largest wage gaps between Canada and the United States are found in the high-growth and high technology sectors: biopharmaceuticals, telecommunications, bioagriculture, and geomatics.

Canadian industries often rely on attracting professionally trained immigrants to help meet their labour demand. Despite the numbers moving to the United States in search of work, Canada gains more skilled workers than it loses overall, thanks to the large number of skilled immigrants moving to Canada. In fact, this ‘brain gain’ outnumbers the flow of Canadian workers to the United States by a wide margin.

Though the word ‘biotechnology’ is relatively new, people have used its principles for centuries to make yoghurt, beer and wine, and more recently, vaccines, and antibiotics and for environmental re-mediation. Advances in the biotech field are bound to affect many aspects of life in Canada, especially in the agriculture, environment and human-health sectors. Small, research-intensive firms make up most of the 300 firms engaged in biotechnology in Canada. Almost half of them are working at improving human health. The health sector accounts for more than 80% of the spending and 62% of the employment in the field. About a quarter of the firms are in the agricultural sector. Employment in biotech research and development is expected to grow more than 25% by 2001, adding to the current shortfall of almost 2,000 positions that require high levels of education and skill.

ome macroeconomic aspects of the Canadian economy—inflation, the federal debt or the value of the Canadian dollar—can have microeconomic consequences. Canadians shopping for groceries, computers, a new car or a house are directly affected by rising costs. ‘Snowbirds’ migrating to Florida for the winter months find that the weak Canadian dollar is shrinking their savings more rapidly. And though the federal government is responsible for paying the debt, it does so using significant shares of our tax dollars.

Nothing can be more deflating to Canadian wallets than inflation. Back in 1981, with inflation running at 12.4%, Canadians had to live with the uncomfortable knowledge that what they bought that year would cost significantly more the next.

Inflation especially hits home for mortgage-holders. For example, a 200-basis point increase in the mortgage rate pushes the cost of a $100,000 mortgage up by $1,624 a year. Small businesses feel an even sharper pinch: a similar increase in interest rates would push the interest on a $2,000,000 loan up by $28,000 annually. Recognizing the importance of maintaining a stable inflation rate, the Bank of Canada introduced inflation control targets in 1991, when inflation was 5.9%.

The inflation control targets assist the Bank in determining what monetary policy actions are needed in the short- and medium-term to maintain a relatively stable price environment. One of the most important benefits of inflation targets is their role in focussing expectations of future inflation. This in turn feeds back into the kind of economic decision-making—by individuals, businesses, governments—that tends to reinforce the capacity of the economy for continuing non-inflationary growth.

The Bank of Canada sets the target inflation rate between 1% and 3% and maintains this even keel by raising or lowering interest rates. If these annual targets are exceeded, the Bank can reduce demand for goods and services by raising interest rates. If inflation is running lower than 1%, the Bank can reduce interest rates to help stimulate consumer and business spending. It has been highly successful in keeping inflation in check over the past decade. Since 1992, the inflation rate has averaged 1.5%.

Interestingly, regulation of interest rates by the Bank of Canada can take anywhere from 18 to 24 months to work its way through the economy and have a significant impact on inflation. A dynamic process of change occurs: first, spending rises or falls, depending on the rate; changes in production and employment follow; and then prices are altered accordingly—ultimately changing the inflation figures. As a result, the Bank of Canada must constantly peer over the economic horizon for any signals that indicate the emergence of upward or downward pressures on prices down the road and then take corrective measures far in advance.

Strong inflationary pressures have been kept in check—despite the upward pressures of the extremely robust Canadian economy of late. Other developments have also helped keep inflation down. Government deficits have been virtually eliminated, accumulated public debts are starting to shrink, and a major restructuring of many Canadian businesses during the 1990s has provided a firm base for price stability and has increased the efficiency of business operations.

The prices in the basket are measured against a base year (currently 1992) that is assigned a value of 100. In 1999, the basket of goods and services had a value of 110.5, representing an increase of 1.7% from 1998.

Food and energy costs tend to fluctuate more than other items in the CPI basket, and are thus removed in order to measure price changes for core components of the CPI. The term ‘core inflation’ refers to the price changes of all goods and services in the basket except food and energy. In 1999, the core inflation rate was 1.5%.

A price index also monitors industrial goods and energy, where rising prices provide an early warning of possible price increases for consumer goods and services. On average, Canada experienced stable industrial prices in the 1990s. In 1999, the Industrial Product Price Index increased by 1.9%, mirroring the increase of the CPI.

When the paper ‘greenbacks’ gave way to the ‘loonie’ coin in 1987, the Canadian dollar was in the middle of an upward trend against the U.S. dollar. Lasting the rest of the decade, the upswing was motivated by various factors, including a buoyant economy and a tightening of monetary policy. The dollar closed the 1980s at US$0.863.

The loonie continued to climb against its American counterpart in the early 1990s. Cresting at US$0.893 in November 1991, it began to depreciate sharply thereafter. Persistent government budgetary problems, decreasing commodity prices and large current account deficits were the primary cause of this downward trend, which was broken up by a brief period of stability through 1995 and 1996. Weakness in the currency flared up once again in 1997 and continued for the rest of the decade, despite a strong Canadian economy. Rebounding over the course of 1999 from a historic low of US$0.638 in August 1998, the dollar averaged US$0.673 over the year.

As with the currencies of most industrialized countries, the value of the Canadian dollar is set by a floating exchange rate mechanism, whereby its price fluctuates according to international market conditions. These conditions, as well as massive speculative activity, can sometimes put the Canadian dollar through periods of volatility and price instability. During these periods, the Bank of Canada may intervene in the international market by buying or selling Canadian dollars. When the Bank buys large amounts of Canadian dollars, demand for the currency is stimulated and upward price pressures result. Selling generates the opposite effect.

Though Canada has experimented with fixed or managed exchange rate policies, it has generally favoured a flexible exchange rate. Recently, the debate on exchange rate regimes has been reviewed in Canada and abroad. The outcome will depend on national circumstances and preferences of countries.

The Canadian dollar came into being less than 150 years ago. French and Spanish silver coins circulated in New France in the 17th and 18th centuries, but because they were in short supply, playing cards were cut to various sizes and signed by the Governor to serve as legal tender. Following the Conquest of Canada by Great Britain in 1759–60, and for about a hundred years following, British pounds, shillings and pence were Canada's official currency. Dollar bank notes were first issued by the Bank of Montreal in 1817 and included a $4 denomination, the official value of the pound. But sundry types of currency still circulated, including Nova Scotia provincial money, American dollars and gold coins, Spanish dollars and even British paper army money used to buy supplies during the War of 1812. British money was rejected in the 1840s, and on January 1, 1858, the Canadian dollar became the official monetary unit of the Province of Canada.

Such was the case for Canada in the early 1990s. By 1995, the federal government had been spending more than it collected in revenues for 25 consecutive years. The deficit—the amount by which government spending exceeds revenues in any given year—was $37.5 billion. As a result of persistent deficit financing, Canada’s total debt load—the accumulation of all past deficits and surpluses since Confederation—had grown from $20 billion in 1971 to over $545 billion in 1995. Covering the interest costs alone was costing Canadians $42 billion by 1994–95—more than the annual deficit and some 26% of the entire federal budget. By March 2000, Canada’s net public debt had reached almost $565 billion.

Recognizing the urgent need to begin balancing the national books, the federal government undertook a massive program to reverse the nation’s financial course in 1994. Because of a reduction in program spending and a growing economy, Canada was well on its way to achieving a financial turnaround before the decade ended. By 1997–98, the government recorded a surplus for the first time in 28 years; the following year marked the first back-to-back surplus in almost 50 years.

Surpluses both achieved and anticipated have allowed the government to direct more money toward paying off the accumulated debt. As a result, the cost of paying interest on the debt has dropped from a high of 36 cents of every dollar of revenue collected by the federal government in 1995–96 to 25 cents in 1999–00. Another promising sign is the decrease in the debt-to-GDP ratio, which gives a picture of the size of a nation’s debt in relation to the size of its economy. This measurement provides a sense of the ability of a country’s economy to service its debt; just as a household with a larger income can finance a larger mortgage, a country with a larger economy can service a larger debt. Though still high by historical and international standards, Canada’s debt-to-GDP ratio had fallen from 71% in 1995–96 to 59% by 1999–00.

Bank of Canada

Industry Canada

Department of Finance

Statistics Canada

Canadian Economic Observer.
Monthly. 11-010-XPB

The Performance of the 1990s Canadian Labour Market.
Occasional. 11F0019MIF00148

National Income and Expenditure Accounts.
Quarterly. 13-001-XPB

Gross Domestic Product by Industry.
Monthly. 15-001-XIE

Labour Force Update.
Quarterly. 71-005-XPB

Innovation Analysis Bulletin.
Irregular. 88-003-XIE

International Migration of Skilled Workers: Facts and Figures.
Industry Canada and Human Resources Development Canada. 1999.

The Economic and Fiscal Update.
Department of Finance. 1999.

The Service Economy at a Glance.
Industry Canada. 1998.

Trends in Canada’s Merchandise Trade.
Bank of Canada. 2000.