Last Wednesday, while in the Calgary airport and awaiting a flight to Winnipeg, I had lunch at a Chili’s. I normally don’t have alcohol with lunch, but the price of a Margarita got my attention: $8.75 in Canadian dollars. That would have been a deal even if it had been $8.75 in U.S. dollars. At an exchange rate of 76 U.S. cents to the Canadian dollar, that’s $6.65 in U.S. dollars. What a bargain! I bought one.
That got me thinking about purchasing power parity. I normally think of that as being something applicable to rich countries versus poor countries. But even between two rich countries, Canada and the United States, it applies. The price was so low, presumably, because of labor costs. Surely the ingredients were roughly the same price in the United States and Canada.
No big insight: Just interesting compared to my priors.
READER COMMENTS
Vivian Darkbloom
Jul 17 2023 at 9:49am
I don’t think the appropriate comparison here is necessarily between the two countries of the United States and Canada. Within the United States, prices vary a great deal, even for a margarita.
I agree with the point about labor costs, which also vary greatly within the US. However, why assume that the “cost of ingredients would be roughly the same between the United States and Canada”? Have you forgotten about liquor and sales taxes? These also vary greatly within the United States and Canada and are a large part of the “cost of ingredients”. The latter recently capped the federal excise tax at 2 percent for this year.
Have you been to Mississippi, Georgia or Arkansas lately?
https://financebuzz.com/margarita-cost-by-state#:~:text=Key%20findings,%2410%20or%20more%20on%20average.
Nevertheless, Cheers!
Rich
Jul 18 2023 at 2:50pm
The truth is quite a few items, groceries and other wise are cheaper in Canada, I live 20 in US miles from the border, and with my cpp/oas I’m darned if I’m gonna pay exchange. I spend 600 to 800 per month in Canada.
I do my homework 1st on prices. White sugar, best price US, .65/lb usd, Canada, .62/lb cdn. Do the math.
Costco, many items same both places, prices rarely more than 10 to 15% higher in canada, factor exchange in, bargain.
Dylan
Jul 17 2023 at 10:03am
Interesting observation. I lived near the Canada border during my college years, a time when the exchange rate was about what it is now. Because of the difference in drinking ages between the countries it was common for college students under the age of 21 to go across the border to drink. The bonus was that, with the exchange rate what it was*, it was also considerably cheaper to drink there as well.
I always found it interesting that while we were going up partially for the cheaper drinks, there was always a steady flow of traffic coming the other way, buying the much cheaper gas, clothes, and electronics in the U.S.
*A few years later the exchange rate was close to parity and I took a visit and I was amazed to find how much more expensive a drink at a bar had gotten. When I had been going up during university, drinks were nominally priced about the same as the U.S., and the exchange rate made for a nice discount. A few years later and drinks were about 50% more expensive than what I would have gotten in a similar place in the U.S.
Mark Barbieri
Jul 17 2023 at 10:21am
When I’ve visited Canada, I haven’t really noticed an obvious income difference between them and the US. But when I look at the OECD’s “Household disposable income – Gross, incl. social transfers in kind, US dollars/capita”, they show the numbers as $62.3K for the US and $40.9K. Are US disposable incomes really 50% higher than those in Canada? According to the OECD site, “This indicator is in US dollars per capita at current prices and PPPs.”
Roger McKinney
Jul 17 2023 at 12:06pm
In Tulsa at Margaritaville, Margaritaville Gold Tequila, Triple Sec, House Margarita Blend. Served on the Rocks $7.05
MarkW
Jul 17 2023 at 1:20pm
There were a few years about 20 years ago that we took family trips to Ontario and the Canadian dollar was something like 65 cents. I thought of it as a ‘metric dollar’ and restaurant meals were wonderfully cheap on a PPP basis. Later, the Loonie approached parity and goods in Canada were more expensive than in the US. Nominal prices and wages within the US and Canada appear to be much stickier than the exchange rate.
gwern
Jul 17 2023 at 1:36pm
Airports are weird places to buy anything because of the landlord+government+clientele (just think of the permutations around ‘duty-free’). So I’d wonder if there is a much simpler explanation involving government taxes being waived for air traffic or imposition of price caps (which happen to work in your favor that time).
Dylan
Jul 17 2023 at 3:15pm
Airports are indeed weird places. This is not perhaps directly relevant, but I’ve been curious to get the Econlog view on a recent airport experience. Typically food and drinks in airports are considerably more expensive and worse quality than the same food outside the airport. I’ve always figured this was due to some combination of whatever process you need to go through with the airport to get the concession license in the first place, plus having a captive audience that can’t go anywhere else, but also that costs were almost certainly higher inside the airport.
Recently I flew through Portland, OR though and found out they have a law that all prices for restaurants at the airport have to match prices for the chain outside the airport. I figured as with any kind of price ceiling, the vendors would have to make up for it somewhere else. Yet, (my admittedly limited) experience was the quality was much better than any other airport I’d ever been to. What’s up with that?
Jose Pablo
Jul 17 2023 at 1:57pm
Surely the ingredients were roughly the same price in the United States and Canada.
I am surprised by this argument. Isn’t the customer’s willingness to pay (and not the costs) the main driver of prices?
David Henderson
Jul 17 2023 at 7:00pm
No. The main drivers are supply (based on cost) and demand (consumer willingness to pay.) You need both blades of the scissors, as Alfred Marshall put it.
Jose Pablo
Jul 18 2023 at 10:48am
Well, David, you were the first one pointing out at just one blade of the scissor. Maybe is the other one the reason for the difference in prices.
nobody.really
Jul 18 2023 at 1:07am
One more (tangentially related) Canada/US comparison:
Previously we had discussed how developed nations no longer produce enough human beings domestically, and therefore must import them. (Talk about outsourcing labor….) Thus I tend to associate nations with more immigration with nations that have more youth. Yet Canada has more stringent immigration requirements–arguably, requirements that favor more well-to-do immigrants, who tend to be older.
NPR reports that roughly 21% of Canadians were born in another country, compared with about 14% of people in the US. Yet by 2047, 25% of Canada’s population will be older than 65; the US won’t cross that threshold until about 2061 or so. In sum, Canada is aging faster than the US in spite of Canada’s greater immigration rate.
Daniel Hill
Jul 18 2023 at 5:38am
I find this when I’m back in Australia and eating out. The nominal price is often similar ($X) but when converted to USD and taking into account the tax and tip are included in the menu price in Australia, the actual cost to me spending USD is about half.
Henry
Jul 18 2023 at 10:40am
This is a product of Canadian agricultural supports for the production of blue agave and limes. The agave fields of Alberta are legendary.
Airports extract monopoly prices since the biggest market option, going someplace else, is not available. We have to find out why this airport has decided to forego using their power.
Jeff
Jul 18 2023 at 2:46pm
We usually say that PPP applies to tradable goods?
Garrett
Jul 27 2023 at 3:45pm
I live in the northeast US. I’ve taken two vacations to Canada in the last year, in large part due to the exchange rate. I enjoyed dining in nice restaurants in Montreal and paying way less than I would have in New York or Boston.
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