Why is Canada Expensive?

Aug 30, 2010 by Adam C. Powell, Ph.D.

A few weeks ago, I attended the Academy of Management annual meeting in Montreal, Canada. Having recently written an entry on the prices of goods and services in China, I kept my eyes peeled while traveling in Canada. A subway fare was $2.75, a can of cola was $1.50, and a plate of poutine – a classic Montreal dish consisting of french fries, gravy, and cheese curds, ran around $5 to $10.

To add insult to injury, taxes on most items ran about 15%. This all led me to wonder why things cost so much more north of the border. After speaking to a wealth manager friend of mine, I think I have arrived at a reasonable answer. Prices are pretty sticky. When exchange rates change and the value of a currency changes, prices don’t move in tandem.

Over the past two years, the value of the U.S. dollar has weakened by 20% against the Canadian dollar. While the two currencies are at around parity in 2010, two years prior, my $2.75 CAD subway fare would have been around $2.30. While still expensive, this would at least be in line with Manhattan prices. A decade ago, in 2000, it took $1.50 CAD to buy a U.S. dollar. So, from an American perspective, the high Canadian prices may be driven by the rapid change in exchange rate. Furthermore, the Canadian government offers social services that the U.S. government does not. While taxes are higher to pay for additional government services, consumer spending on non-governmental versions of those services (like healthcare) may be lower.