The Commodity-Price Cycle and Regional Economic Performance in Canada

This paper attempts to provide one interpretation of the broad regional economic history of Canada since the early 1970s. As the title of the paper suggests, we believe that, to a significant degree, regional diversity in economic performance reflects movements in Canada's terms of trade, which very frequently are tied to developments in world commodity markets. To state our hypothesis briefly, an improvement in Canada's terms of trade due to a rise in world commodity prices tends to boost output in the regions that produce primary products and dampen output in those that use primary products as an input. Because these activities are not uniformly distributed across regions in Canada, such shocks have implications for regional economic performance. A qualitative analysis of three episodes, 1974, 1978 and 1987, seems to be broadly supportive of this theory. A statistical analysis using VARs also provides some support. Our results may have implications for other branches of the economic literature. One example is studies of long-term convergence between Canada's regions. Such studies might in fact be underestimating fundamental convergence because occasional terms-of-trade shocks are tending to derail the process; alternatively, these studies might actually be detecting evidence of re-equilibration to terms-of-trade shocks rather than fundamental convergence.