Since the formation of the Canada-U.S. Free-Trade Agreement in 1989, Canada's international competitiveness has increased strongly. However, it has been argued that this improvement in Canada's cost competitiveness vis-à-vis the U.S. has been entirely due to a depreciating Canadian dollar. Indeed, during the 1990s manufacturing productivity in Canada grew by 19.0% compared with 26.8% in the United States, thus widening the existing productivity gap.

 

Why is the Canadian manufacturing sector less productive than that of the United States? Why has this productivity gap not closed since the formation of North American free trade? A number of reasons have been suggested: (1) the average size of firms in Canada may be to small to exploit economies of scale; (2) the large component of foreign-controlled manufacturing may result in less attention being paid to Canadian plants; (3) the skill level of Canadian workers may be falling behind that of American workers; (4) the level of investment in productive capital may be too low; (5) the size of the Canadian high-tech sector may be too small; and (6) the level of research and development.

           

This presentation focuses on national manufacturing data, using a variable-cost CES-translog cost system. In some ways the techniques discussed may be easily applied to other sectors of the economy, for example to the health-care sector. In other ways major problems could result. This presentation will attempt to outline the issues involved in the migration of modeling techniques that are well established in the goods sector to the service sector in general, and the health-care sector in particular.