Investigations into the US-Canadian Price Gap

Dori Lee Wilson

Abstract


 

This paper examines the U.S.-Canadian Price Gap by analyzing the common currency relative price of several homogenous and tradable goods over the period 2001-early 2013. In spite of decades of increasing integration between the two countries, we document the fact that the law of one price continues to fail for many food products between U.S. and Canada. The period under study has been marked by a large appreciation of the Canadian dollar while the common currency relative Canadian price of most of these goods also followed a similar trend. We find that the increased competitive pressure associated with a stronger Canadian dollar has not resulted in lower Canadian prices, thus reflecting a complete lack of exchange-rate pass-through. To the contrary, the Canadian price of the majority of goods under study has increased. We use linear regressions to further the analysis, which suggests not only that that high trade barriers still exists between the two countries but that the concentration of market power in the grocery retail industry is an important factor in preventing the equalization of prices.


Keywords


US, Canada, international trade,the law of one price,

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