Running head: CANADA AND MEXICO

Comparative Macroeconomic Analysis of Canada and Mexico

David S. Spencer
Thomas Edison State College

Author Note
This is the Final Project for the October 2013 term of ECO-111-OL, Macroeconomics.

CANADA AND MEXICO

Comparative Macroeconomic Analysis of Canada and Mexico

The North American Free Trade Agreement is dominated by the economy of the United
States. At 15 trillion U.S. Dollars, the U.S. economy is five times larger than the economies of
Canada and Mexico combined (World Bank, 2013). Despite being much smaller than the United
States, the economies of Canada and Mexico are not small. Canada is the eleventh largest
economy in the world Mexico is the fourteenth largest (World Bank, 2013). In this examination
of macroeconomic indicator trends of the last ten years, this paper will examine Canada and
Mexico. These two nations are directly coupled to the engine of the world economy through
their land borders. They serve as good examples of a mature economy, Canada, and an emerging
economy, Mexico, for examining the GDP and GDP growth, exchange rates, inflation, short-term
interest, unemployment, and trade deficits.
Economic Indicator Trends
GDP and GDP growth rate
GDP
The gross domestic product, as seen in Table 1 and Figure 1, has grown in real terms
during the past decade in both Canada and Mexico. While from 2003 to 2012 GDP grew 210%
in Canada and 168% in Mexico (World Bank, 2013), this growth was not constant. Looking
back to 2000, there are four clear trend periods reflected in Real GDP. From 2000 to 2002
Canadas GDP was stagnant in both countries likely as a result of the shallow 2001 recession in
the United States (Kliesen, 2003). From 2003 to 2008 both economies grew at a steady pace.
This growth turned to a sharp decline in 2009 correlated to the aftermath of the 2008 financial
crisis. Since the crisis, both nations have recovered to pre-recession levels of GDP; however,
due to the fundamental difference in the latest recession from those of the past, the latest data

CANADA AND MEXICO

shows stagnation (Davis, 2009). Despite stagnation, the economic conditions are better in both
countries, as measured in GDP, than they were a decade ago (World Bank, 2013).
Contrasting the trends in real GDP between Canada and Mexico. It is clear that they are
closely correlated. This correlation is a result of the correlation of both economies to the United
States, which has been a strong theme since the implementation of the North American Free
Trade Agreement, NAFTA, in 1994 (Central Intelligence Agency, 2013).
GDP growth rate
Canadian and Mexican GDP has seen volatile growth rates in the past decade, as seen in
Table 2 and Figure 2 (World Bank, 2013). The trends in the both countries correlate to the
periods seen in the real GDP described above, being the 2001 recession, mid-decade growth, the
2008 financial crisis and recovery, and current stagnation.
Excluding the effects of the two recessions seen in the data, Canadian GDP growth has
been flat over the past decade (World Bank, 2013). And the more recent trend since 2005 has
been of declining GDP growth in Canada.
Mexican GDP growth has increased over the past decade. During this period of trending
increases, Mexican GDP growth has been much more volatile. Specifically, Mexican GDP
growth declined in 2005, 2007 to 2009, and in 2011. Despite this volatility, we see growth of
1.35 in 2003 and growth of 3.92 in 2012 (World Bank, 2013).
In contrasting the trends between Canadian and Mexican GDP growth during the past
decade, the correlation seen in the related statistic of real GDP disappears. The growth rates of
both countries show the effects of the recessions together, but the overall the Mexican economy
is accelerating while the Canadian economy is decelerating. This contrast shows of the catch-up

CANADA AND MEXICO

effect and the law of diminishing returns on the economic conditions in Canada versus Mexico
(Mankiw, 2009).
Exchange rate
There is no correlated trend between the exchange rates of Canadian Dollars and
Mexican Pesos, respectively to US Dollars, as seen in Table 3 and Figure 3 (FXTOP sarl, 2013).
This lack of correlation between these two North American economies is a reflection of the
difference between the mature economy of Canada, and the emerging economy of Mexico (CIA,
2013).
The exchange rate of the Canadian Dollar, to the US Dollar, has strengthened consistently
over the past decade (FXTOP sarl, 2013). The only exception to this consistent strengthening
was after the 2008 financial crisis, when there was a flight to quality and US Dollar denominated
securities (Yeyati, Ghezzi, & Broda, 2009). The meaning of the strengthening Canadian Dollar
to the national economy in Canada is a reflection of the strength of export prices for Canadian
commodity prices. It is also a reflection of Canadas triple-A credit rating (Ho, 2012).
The exchange rate of the Mexican Peso, to the US Dollar, has been in a consistent glide
path of slow during the past decade. In 2000 the Peso traded at 0.105 US Dollars, and in 2013 it
traded at 0.078 US Dollars (FXTOP sarl, 2013). The slow decline of the Mexican Peso to the US
Dollar is not due to Mexican economic weakness, but due to a strengthening US dollar to the
Peso (Natarajan, 2013). The relatively weaker Mexican Peso could have positive meaning for
the supply side of the economic conditions of Mexico, as a stable price in a Mexican product
means a deflating price in US Dollars during the past decade.
In contrasting the foreign exchange trends of the Canadian Dollar and the Mexican Peso,
there is a non-correlation that speaks to the difference in the two economies. Canada is a mature,

CANADA AND MEXICO

commodity export-driven economy, while Mexico is an emerging neighbor affected by the shifts
in US currency exchange rates and financial market trends (Natarajan, 2013).
Inflation rate
Both Canada and Mexico have had stable inflation rate trends over the past ten years, as
seen in Table 4 and Figure 4. This comes off of a sharp drop in inflation in Mexico that occurred
in the 1990s (World Bank, 2013). Canadas inflation rate has been stable and gradually falling
over the past ten years, with a rate of 2.75% in 2003 and an average rate of 2.07% between 2010
and 2012. This rate of inflation is consistent with the slowing GDP growth rate for Canada,
meaning likely slow growth economic conditions in Canada. Like Canada, consumer price
inflation in Mexico has been stable since 2003 (World Bank, 2013). While stable, Mexican
inflation has been one to two percentage points higher than Canadian inflation. This higher, but
controlled, inflation correlates to the higher GDP growth rate and means likely continued
acceleration of positive economic conditions in Mexico.
In contrasting the inflation rate trends between Canada and Mexico, it is easy to see
correlation to the GDP growth rate and the trajectory of each economy. The only major
deviation between the two trends was during and after the 2008 financial crisis. This saw a sharp
decline in Canadian inflation and a shape increase in Mexican inflation with a difference in rate
of 5.0% in 2009 (World Bank, 2013).
Interest rate on short-term government debt
The real interest rates on short-term government debt in Canada and Mexico have been
very volatile over the past ten years, as seen in Table 5 and Figure 5. Real interests rates turned
negative for Mexico in 2003, and for both Canada and Mexico post-2008 financial crisis (World
Bank, 2013).

CANADA AND MEXICO

Canadian short-term interest rates have been volatile over the past ten years, with a clear
interest rate shock post-financial crisis (World Bank, 2013). However, in conjunction with the
monetary policy of other mature economies, Canada has maintained a low real interest rate since
the shock. These low rates contribute to the growth of the money supply. These low rates
translate to accommodative policy lowering the cost of capital creating more favorable economic
conditions.
Mexican short-term interest rates have been even more volatile than Canadas over the
past ten years. The largest deviation was in 2003, when the real interest rate was -10% for
Mexico. While volatile for most of the decade, heading into the financial crisis, Mexicos
interest rates began to stabilize. And the fluctuation through the financial crisis was much milder
than that of Canada. Quantitative easing by the American Federal reserve has meant more
favorable economic conditions in Mexico as it has held down borrowing costs and fueled
demand for peso-denominated assets (Bain & Levin, 2013).
The volatility of real interest rates on short-term government debt in Canada and Mexico
over the past ten years makes contrasting their trends very difficult. The biggest difference seen
in the respective volatility is the greater magnitude of the shifts in the Mexican real interest rates.
This possible partly because of the smaller size of the Mexican economy, in comparison to
Canada but more importantly the United States, but it is primarily a result of the emerging nature
of the Mexican economy. Investors take on much more risk and cost when investing in emerging
markets like Mexico. During crises, these investors are more likely to flee to quality than
domestic investors (Bain & Levin, 2013).

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Unemployment rate
Trends in unemployment in Canada and Mexico are relatively correlated through most of
the past decade, until the 2008 financial crisis (World Bank, 2013)1, as seen in Table 6 and Figure
6. The financial crisis and resulting recession caused a large spike in the unemployment rate in
both countries. The unemployment rates diverge between Canada and Mexico in the latest
recovery. In Canada, the unemployment rate peaked in 2009 at 8.3% and has been declining
since. For Canada, this decreasing unemployment means improving economic conditions. In
Mexico, the unemployment rate rose to 5.2% in 2009 and has been consistent and slowly rising
since then (World Bank, 2013). While the data from the world bank ends in 2011, The
Economist reported as recently as December 2013 that Mexican unemployment was
approximately 5% (Haver Analytics, 2013). This means that Mexico is experiencing a jobless
recovery with consistent unemployment with rising GDP. This means possible negative
economic conditions in the future for Mexico, as the Mexican economy may be held back
without the benefit of growing household income from wages.
The most interesting contrast between Canadian and Mexican unemployment over the
past ten years is looking at the unemployment since the 2008 financial crisis and resulting
recession. Many of the previously examined economic indicators show a strengthening Mexican
economy, and a growing but slowing Canadian economy. The unemployment data does not
correlate with what would normally be expected given the previously examined indicators.
Trade deficit
The trends in the trade deficits of Canada and Mexico near parity at the end of the period
analyzed coming from very divergent beginnings ten years ago, as seen in Table 7 and Figure 7.

CANADA AND MEXICO

The trend in Canada began with multi-billion US Dollar trade surpluses from 2000 to
2008 (OECD, 2013). Those surpluses ended with the financial crisis of 2008 and the following
recession. Since recession, Canada has had only one small trade surplus and the most recent
numbers show a growing deficit in net trade in goods (OECD, 2013). These recent deficits are
the result of the ever strengthening Canadian Dollar and uncertain foreign export markets
(Reuters, 2013). This means difficult economic conditions for Canada.
Mexico has experienced an increase in exports, primarily to the United States (USTR,
n.d.). The trend in Mexico over the past ten years has been a reduction in the trade deficit that is
now a tenth of what it was a decade ago. Other than the distortion of the 2008 financial crisis
and following recession, this has been a steady linear trend. If this trend continues with the
strengthening U.S. economy, then this trend means improving economic conditions in Mexico.
Contrasting the trade deficit in Canada and Mexico is interesting because at the present
time the two trade deficits are near parity, compared to where they started ten years ago;
however, while the current deficits are near equal, the trends tell a very different story. Canada
went from a strong exporter to current increasing deficits, while Mexico has gradually increased
exports in competition with Asian low labor cost manufacturers.
Strengths and Weaknesses
Both Canada and Mexico are relatively free economies. The Heritage Foundation ranks
Canada sixth, and Mexico Fiftieth on the Index of Economic Freedom (2013). The strengths and
weaknesses of Canada and Mexico correspond closely to their state of development in the
shadow of the United States.

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Canada
Canada is distinguished by its mature and diversified economy and high-tech industrial
society (CIA, 2013). GDP growth over the past decade, and five decades for it, was fueled by
growth in manufacturing, mining and petroleum, and service sectors (CIA, Canada, 2013).
The maturity of the Canadian economy and stability of governance and society is a
strength of the Canadian economy. This strength is quantifiable in stability of interest rates over
the past ten years (World Bank, 2013). The Canadian economy also gains strength from recent
reductions in unemployment. While unemployment is higher in Canada today than it was ten
years ago, the rate has been trending downward after the latest recession (World Bank, 2013).
Canadas economy is showing weakness in GDP growth. Canada is a victim of its own
success, years of growth have made Canada very efficient and productive. Further growth is
running into the law of diminishing returns (Mankiw, 2009). This weakness is compounded by
the strength of the Canadian Dollar which represents a weakness to Canadas large export sector
(CIA, 2013). While a strong currency depresses foreign demand, weak inflation signals slow
growth to domestic demand. These factors together contribute to negative net exports for
Canada, which had a multi-billion dollar trade surplus ten years ago.
Mexico
The output of Mexicos economy is 168% of what it was ten years ago (World Bank,
2103) as measured in GDP. This strength in GDP is a result of acceleration of GDP growth in
Mexico as the nation diversifies its economy and increasingly competes with overseas firms for
U.S. business (Natarajan, 2013). The foreign exchange rate of the Mexican Peso has also been a
strength to the Mexican economy. The peso has gradually weakened against the U.S. Dollar over
the past ten years, supporting Mexican firms production through lower prices to consumers in

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10

the U.S. economy (FXTOP sarl, 2013). Stable inflation in the 4% range has increased domestic
demand contributing to GDP and GDP growth.
Mexico maintained a trade deficit throughout the entire ten years examined (World Bank,
2013); however, Mexicos trend in net trade is a strength as the country has decreased its trade
deficit to less than a tenth of what it was ten years ago. In light of the other strengths of the
Mexican economy, its net trade deficit is likely to turn to a net trade surplus in the near future.
Mexico is an emerging market, and is much less stable than mature economies and
nations such as Canada. Shifts in policy, violence, and external factors such as global investor
flight to quality, in U.S. assets, have all played a part in the volatility of Mexican short-term
interest rates during the past ten years. This volatility in the price of money is a key weakness to
the Mexican economy that can discourage foreign direct investment and frustrate domestic
developers and entrepreneurs (Bain, 2013). This lack of access to capital may be a factor in the
continued elevation of the unemployment rate in Mexico since the recession of 2009. The steady
level of unemployment in Mexico since the recession has been called a jobless recovery. This
will damage the development of Mexican service sector and movement to a consumer-led mature
economy.
Conclusion
In conclusion these two economies show promise for the future, if they are able to
overcome their structural challenges. Canada is a mature, productive, and efficient economy that
faces challenges continuing growth. Mexico is an emerging economy that faces challenges
promoting stability, investment, and full employment. Canada and Mexico are not unique in
their strengths and challenges; instead they are the archetypes of mature and emerging

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11

economies. These structural challenges face nations across the world, and are compounded by
the economic events that can cause a sea change in an economy, for better or worse.
The 2008 financial crisis the most striking example of this type of transformative event
that occurred during the ten-year period examined. The Crisis and following recession had an
affect, usually significant, on every indicator examined in the scope of this paper. While some of
the indicators such as GDP, GDP growth, and interest rates experienced closely correlated trends
through the crisis and recession, other equally important indicators such as inflation and net trade
had negative correlations throughout the past five years since the collapse of Lehman Brothers.
In this paper and all macroeconomic studies it is important to differentiate normative
statements and predictions between mature and emerging economies. This is important when
examining policy problems during crises and recessions, but also during recoveries and more
normal business cycles. For instance the weakness now seen in the Mexican unemployment rate
did not appear until a few years into the current economic recovery coincident with accelerating
GDP growth (World Bank, 2013). Different economies in different stages of development, and
under each nations unique circumstance require tailored application of economic principles
when formulating economic and political policy.
This is especially true in the new normal described by Ian Davis as a combination of less
financial leverage and more government (2009) in an era of lower growth.
In short, the economies of Canada and Mexico express the complexities of
macroeconomics that exist throughout the globe. Economists study a limited, but expanding, set
of indicators that help track economic trends; however, because of unforeseen events and the
complex behavior of humans seeking the use of scarce resources which have alternative uses
(Sowell, 2007) the macroeconomic study of economies will never be complete.

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12

References
Bain, B., & Levin, J. (2013, May 16). Mexico Peso Drops on Speculation Fed to Consider
Easing Stimulus. Bloomberg News. Retrieved December 10, 2013, from
http://www.bloomberg.com/news/2013-05-16/mexico-peso-drops-on-speculation-fed-toconsider-easing-stimulus.html
Central Intelligence Agency. (2013, November 21). Mexico. The World Factbook. Retrieved
December 10, 2013, from https://www.cia.gov/library/publications/the-worldfactbook/geos/mx.html
Davis, I. (2009, March). The new normal. McKinsey Quarterly. Retrieved December 10, 2013,
from http://www.mckinsey.com/insights/strategy/the_new_normal
FXTOP sarl. (2013, December 7). Historical rates. Historical Exchange Rates from 1953 with
Graph and Charts. Retrieved December 7, 2013, from http://fxtop.com/en/historicalexchange-rates.php?MA=1
Haver Analytics. (2013, December 7). Output, prices and jobs. The Economist. Retrieved
December 10, 2013, from http://www.economist.com/news/economic-and-financialindicators/21591235-output-prices-and-jobs%20
Heritage Foundation. (2013). 2013 Index of Economic Freedom. Index of Economic Freedom:
Promoting Economic Opportunity and Prosperity by Country. Retrieved December 10,
2013, from http://www.heritage.org/index/
Ho, S. (2012, December 5). Canadian dollar seen strengthening in 2013 as risks dissipate, rates
rise: Reuters pol. TORONTO (Reuters). Retrieved December 10, 2013, from
http://ca.reuters.com/article/businessNews/idCABRE8B40PZ20121205?sp=true
Kliesen, K. L. (2003). The 2001 Recession: How Was It Different and What Developments May
Have Caused It? Federal Reserve Bank of St. Louis Review, 85(5), 23-38. Retrieved
December 10, 2013, from http://research.stlouisfed.org/publications/review/article/3679
Mankiw, N. G. (2009). Principles of macroeconomics. Mason, OH: South-Western Cengage
Learning.

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13

Natarajan, P. (2013, July 26). Mexican Peso Leads Decline in Emerging-Market Currencies. The
Wall Street Journal. Retrieved December 10, 2013, from http://online.wsj.com/article/BTCO-20130726-709176.html
Organisation for Economic Co-operation and Development. (2013, December 7). OECD
Statistics. OECD.Stat Extracts. Retrieved December 7, 2013, from http://stats.oecd.org/
Reuters. (2013, April 09). Canadas trade deficit doubles as exports drop, imports rise. Financial
Post. Retrieved December 10, 2013, from
http://business.financialpost.com/2013/09/04/canadas-trade-deficit-doubles-as-exportsdrop-imports-rise/
Sowell, T. (2007). Basic economics: A common sense guide to the economy (4th ed.). New York,
NY: Basic Books.
U.S. Trade Representative. (n.d.). Mexico. Office of the United States Trade Representative.
Retrieved December 10, 2013, from http://www.ustr.gov/countriesregions/americas/mexico
World Bank. (2013, December 7). World DataBank. World Development Indicators. Retrieved
December 7, 2013, from http://data.worldbank.org/indicator
Yeyati, E. L., Ghezzi, P., & Broda, C. (2009, October 16). The new global balance Part II:
Higher rates rather than weaker dollar in 2010. Vox. Retrieved December 10, 2013, from
http://www.voxeu.org/article/why-us-dollar-may-strengthen-2010

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Footnotes

The unemployment data for Mexico from the World Bank originates from an agency of

the Mexican Federal Government, the Insituto Nacional de Estadistica Y Geografia. It is not
reasonably credible that the real unemployment rate in Mexico is two percentage points lower
than in the United States or Canada. Further investigation of the true unemployment rate and
underemployment rate in Mexico is beyond the scope of this paper; however, it is important to
note the possibility of inaccurate data.

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15
Tables

Table 1
Real GDP (Billion Current USD)
CAN
MEX

2000
725
581

2001
715
622

2002
735
649

2003
866
700

2004
992
760

2005
1,134
849

2006
1,279
952

2007
1,424
1,036

2008
1,503
1,092

2009
1,338
884

2010
1,577
1,035

2011
1,778
1,158

2012
1,821
1,178

Note: Data compiled from The World Banks World Development Indicators (WDI) DataBank
(2013). No data available for 2013.

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Table 2
GDP growth (annual %)
CAN
MEX

2000
5.23
6.60

2001
1.78
-0.16

2002
2.92
0.83

2003
1.88
1.35

2004
3.12
4.05

2005
3.02
3.21

2006
2.82
5.15

2007
2.20
3.26

2008
0.69
1.19

2009
-2.77
-5.95

2010
3.21
5.28

2011
2.53
3.89

2012
1.71
3.92

Note: Data compiled from The World Banks World Development Indicators (WDI) DataBank
(2013). No data available for 2013. Data rounded to three significant digits for table legibility.

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Table 3
Exchange Rate (to USD)
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

CAD to USD
0.673539
0.645924
0.637158
0.715356
0.769438
0.825734
0.881829
0.935822
0.943632
0.880176
0.97103
1.011729
1.000532
0.973352

MXN to USD
0.10566
0.106825
0.103492
0.092128
0.088636
0.091837
0.091795
0.091548
0.090482
0.074211
0.079194
0.080738
0.07605
0.078475

Note: Data compiled from fxtop.coms historical exchange rates data set (2013).

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Table 4
Inflation, consumer prices (annual %)
CAN
MEX

2000
2.72
9.50

2001
2.53
6.36

2002
2.26
5.03

2003
2.76
4.55

2004
1.86
4.69

2005
2.21
3.99

2006
2.00
3.63

2007
2.14
3.97

2008
2.37
5.13

2009
0.30
5.30

2010
1.78
4.16

2011
2.91
3.41

2012
1.52
4.11

Note: Data compiled from The World Banks World Development Indicators (WDI) DataBank
(2013). No data available for 2013. Data rounded to three significant digits for table legibility.

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Table 5
Real interest rate (%)
CAN
MEX

2000
3.01
4.30

2001
4.64
6.53

2002
3.08
1.17

2003
1.36
-10.03

2004
0.79
-1.49

2005
1.08
4.93

2006
3.06
0.77

2007
2.82
1.83

2008
0.60
2.23

2009
4.41
2.76

2010
-0.33
1.23

2011
-2.52
-1.03

2012
1.31
1.07

Note: Data compiled from The World Banks World Development Indicators (WDI) DataBank
(2013). No data available for 2013. Data rounded to three significant digits for table legibility.

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Table 6
Unemployment (% of labor force)
CAN
MEX

2000
6.80
2.60

2001
7.20
2.50

2002
7.70
2.90

2003
7.60
3.00

2004
7.20
3.70

2005
6.70
3.50

2006
6.30
3.20

2007
6.00
3.40

2008
6.10
3.50

2009
8.30
5.20

2010
8.00
5.20

2011
7.40
5.30

2012

Note: Data compiled from The World Banks World Development Indicators (WDI) DataBank
(2013). No data available for 2012 and 2013. Data rounded to three significant digits for table
legibility.

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Table 7
Net Trade in Goods (Current USD)
CAN
MEX

2000
3.15
-0.69

2001
3.28
-0.80

2002
2.52
-0.64

2003
2.68
-0.48

2004
3.61
-0.73

2005
3.82
-0.63

2006
3.18
-0.51

2007
3.34
-0.84

2008
3.86
-1.44

2009
-0.41
-0.39

2010
-0.39
-0.25

2011
0.09
-0.12

2012
-0.60
0.00

Note: Data compiled from The Organisation for Economic Co-operation and Developments
StatExtract data set (2013). No data available for 2013. Data rounded to three significant digits
for table legibility.

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Figures

Real GDP (Current USD)

Canada
Mexico

Figure 1. Representation of the data in Table 1.

GDP growth (annual %)

Canada
Mexico

Figure 2. Representation of the data in Table 2.

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Exchange Rate (to USD)

CAD > USD

MXN > USD

Figure 3. Representation of the data in Table 3.

Inflation, consumer prices (annual %)

Canada
Mexico

Figure 4. Representation of the Data in Table 4.

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Real interest rate (%)

Canada
Mexico

Figure 5. Representation of the data in Table 5.

Unemployment (% of labor force)

Canada
Mexico

Figure 6. Representation of the data in Table 6.

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Net Trade in Goods (Current USD)

Canada
Mexico

Figure 7. Representation of the data in Table 7.