Gross Domestic Product - GDP

Gross Domestic Product - GDP

The GDP (ppp) for the United States has seen steady growth over the past five years. The GDP (ppp) for Canada has also seen steady growth over the same period. However, there have been differences between the two over that span. This comes despite the fact that each nation is the other's largest trade partner. This paper will examine the trends between the GDP in the two countries and attempt to analyze the reasons for divergence between the performances of these different nations.

GDP has since 2004 grown 26.8%; over the same time period the Canadian GDP grew 32.9%. GDP in the United States slowed from the middle part of the decade in the past couple of years, going from robust 6.9% growth in 2005 to 5.5% growth last year. Over this span, there have been several key catalysts for economic growth. One was the housing boom, which led to robust construction start figures. This, however, became a catalyst for economic slowdown in the past year, when real GDP growth slumped to 3.4% and ppp GDP growth fell to 5.5%.

Another factor that typically has an impact of economic activity in the United States is oil prices. The slowdown in growth in 2008 corresponds not only with the bursting of the real estate bubble, but with a sharp increase in fuel prices in the first half of the year. Increased fuel prices raise the cost of business, in particular because the American economy is built around a model of low-cost long-distance transportation. Indeed, the relatively low oil prices in a sharp increase in consumption in 2006 and 2007. Consumption leveled off dramatically in 2008 when prices increased.

In Canada, GDP growth has tended to mirror that of the United States. However, one key difference between the two economies is that Canada is a net producer of energy rather than a net consumer. This has been one of the key reasons for disparity between U.S. And Canadian GDP numbers. For example, Canadian oil consumption spiked one year in advance of U.S. consumption, in 2005. This did not result in any difference in the GDPs of the two nations. However, in 2006 when U.S. consumption spiked, the Canadian economy was the beneficiary. GDP growth in Canada that year was 8.6% versus just 4.7% in the U.S.

Demand for fuel in the United States does not necessarily create a benefit to the U.S. economy. What it does is allow Canada to sell more fuel to the United States. Moreover, American firms trade more with Canada as they begin to ramp up their economy. These trends mirror the trends with the Mexican economy as well, that country being another key supplier of both energy and general trade to the U.S.

In 2008, we can see higher fuel costs impact both economies. Canada's GDP increased 8.1% as a result of higher prices paid for its energy. By contrast, higher fuel prices forced U.S. businesses to slow down their pace of growth, and the nation recorded relatively soft GDP growth as a result. The slowing demand in the U.S. reduced Canada's energy output, but the higher prices compensated for that (Scotton, 2008).

Overall, the United States has seen strong growth in GDP over the past five years. This reflects a trend of strong growth that only recently began to slow down. Its main trading partner and energy source Canada, saw similarly strong growth, but with year-over-year differences that relate to the nature of energy trade between the two countries.