Gross Domestic Product (GDP) is a poor measure of our quality of life. Governments, however, love to trot out any gains as if they mean something to the average Canadian.
GDP alone fails to provide a comprehensive and accurate representation of the average Canadian's standard of living. It is a flawed metric due to its disregard for income distribution, exclusion of non-market activities, failure to account for environmental and social factors, and its neglect of subjective well-being.
Still, it is a fairly standardized measure in comparing Canada to other countries. Again, Ottawa is keen to boast when the GDP here outperforms that of other industrialized countries. There’ll be no running up the flagpole the findings of a recent TD Bank study that shows Canada as a laggard when it comes to GDP per capita, which is a better indicator of our quality of life.
One major shortcoming of GDP as a measure of standard of living is its failure to consider income distribution within a country. GDP calculates the total value of all goods and services produced within a nation over a specific period, but it does not account for how that income is distributed among the population. This means that even if the overall GDP increases, it does not guarantee an improvement in the average Canadian’s quality of life if the wealth is concentrated in the hands of a few individuals. Inequitable income distribution can result in a significant disparity in material well-being, with some Canadians enjoying a high standard of living while others struggle with poverty and limited access to essential resources.
Moreover, the underlying numbers call into question Canada’s immigration numbers, which have given a misleading boost to basic GDP statistics.
In Mind the Gap: Canada is Falling Behind the Standard-of-Living Curve, the TD study finds that, adjusting for population increases, Canada’s real GDP per capita has been falling for years.
“At the start of the 1980s, Canada enjoyed an edge against the average of advanced economies of almost US$4,000 while keeping fairly level with U.S. estimates. By 2000, this advantage had all but evaporated, and U.S. per capita GDP had pulled ahead of Canada’s to the tune of over US$8,000. Still, since the 2014-15 oil shock, Canada’s performance has gone from bad to worse. Canadian real GDP per capita has grown at a meagre rate of only +0.4% annually, paling in comparison to the advanced economy average of +1.4%,” the report finds.
When GDP per capita is falling, it indicates a decrease in the average income and economic well-being of individuals in a country. In such a scenario, GDP growth alone may not be an accurate measure of any improvement in living standards.
“Economic growth does not necessarily equate to economic prosperity. While aggregate GDP is one thing, standard-of-living is another, and when Canada’s economic performance is adjusted for the rising population count, it reveals a picture that leaves much to be desired. This country’s lagging standing in per-capita GDP is not new, but it has been worsening since the pandemic,” reads the report.
That theme was taken up last week by the Globe and Mail’s Tony Keller, who notes the immigration angle … and the unwillingness to address it.
“Canada’s higher-than-our-peers population growth – powered by a higher immigration rate – is not why our economic performance in recent decades has left something to be desired. But neither is the country’s higher population growth, and the Liberal government’s plan for ever-rising immigration, some kind of magic solution for goosing Canadian living standards,” he writes.
“If Canada were a country where a calm and rational discussion of immigration was possible, we’d be talking about this. We’d be thinking hard about how the immigration system can best be designed to raise living standards for the average Canadian – not just growing the population and the economy, but growing the economy at a pace considerably faster than the population.”
There are plenty of reasons for casting doubt on the traditional GDP-centric view governments love to cite.
GDP growth can occur without having a positive impact on all segments of society. When GDP per capita falls while overall GDP increases, it suggests that the benefits of economic growth are being unevenly distributed, with a small portion of the population capturing a majority of the gains. This can exacerbate income inequality and lead to social and economic disparities within the country.
GDP only captures the monetary value of goods and services produced within an economy. It does not consider other important indicators of well-being such as healthcare, education, environmental sustainability and social factors. Falling GDP per capita may be an indication that these essential aspects of quality of life are not improving or are declining, despite overall GDP growth.
GDP per capita takes into account inflation and the cost of living. If GDP growth is outweighed by the increase in the general price level, the purchasing power of individuals can decrease, leading to a decline in living standards. Even with increasing GDP, if the costs of goods and services are rising faster than income, people can feel worse off. That’s certainly the case just now, especially with staples such as food growing ever-more expensive even as inflation is said to be waning.
Falling GDP per capita may also indicate underlying economic issues such as structural inefficiencies, lack of investments, or declining productivity. These factors can impact long-term economic growth potential and hinder sustainable improvements in living standards.
Certainly, the TD study identifies those concerns. Canadian firms are traditionally behind the curve when it comes to research and development. More directly, employers are relying on huge immigration numbers to push down wages and to fill vacancies rather than offering better pay and investing in the likes of technology.
All told, Canadian productivity – never a strong suit – has been dropping, especially in comparison to other Western economies. Canada’s a leader in growing its population, but falling behind in other prime economic indicators. The two aren’t always directly linked, but the per capita GDP comparisons show we’re going about things the wrong way.