According to the IMF, America’s GDP per capita (in PPP terms) is 35.6% higher than in Canada. In a recent post, I pointed out that to the casual observer, Canadian living standards seem fairly close to those in the US, albeit slightly lower. In this post I’ll try to address the question of why the gap in GDP per capita appears to be much larger than the gap in living standards.
Health care is a good place to start. The US spends just under 18% of GDP on health care, whereas Canada spends a bit less than 12% of GDP. In my view, much of the US spending on health care is pure waste, caused by heavy explicit and implicit subsidies, combined with severe restrictions on the supply of health care. But even if you assume that 100% of American health care spending is useful, the gap in spending could help to explain why the perceived gap in living standards is smaller than the gap in per capita GDP. A tourist visiting Canada notices things like houses, home appliances, cars, clothes, restaurants, infrastructure, and other aspects of living standards. Unless they visit a hospital, they are unlikely to notice the part of GDP that goes into health care.
A similar argument applies to military spending, an area where the US outspends Canada by 2.1% of GDP (3.4% vs. 1.3%). Once again, there are differing views as to whether this spending is useful or wasteful. But there is little doubt that military spending doesn’t factor into perceived living standards.
Those two factors alone can explain 8% of the 35.6% gap in GDP/capita. But there are numerous other areas that also might help to explain a portion of the gap. According to ChatGPT, the US spends 6.0% of GDP on education and Canada spends roughly 5.2% or 5.3% of GDP (both public and private). Again, tourists might not notice that difference.
I recently got a note that my umbrella insurance premiums would almost double next year. They cited this reason:
Rising personal injury settlements and litigation costs: California is known for high jury awards and legal settlements in personal injury cases, such as those from auto accidents or premises liability. This is influenced by factors like California’s comparative negligence laws and the absence of caps on non-economic damages in many cases, leading to larger payouts.
Driving around California, you see hundreds of billboards encouraging people to sue for real or imagined slights that they might have received. You got drunk and smashed up your car? Sue the bartender. I suspect that Canada has a less predatory legal system, which might contribute to higher living standards for a given quantity of GDP. (Please correct me if this is incorrect—I did not see those billboards on a recent trip to Canada.)
The US has a much higher crime rate than Canada, and as a result it probably spends more on crime prevention. This includes obvious expenditures such as police and prisons. But crime also has indirect effects, such as making urban living in Canada more pleasant than in many American cities. Metro Chicago is richer than Toronto, but urban crime affects how Chicago is perceived. This factor might also contribute to the perception that America’s living standards are not quite as high as you’d expect for a country that is 35.6% richer than Canada, which is itself a relatively affluent country by global standards.
In the end, I estimated that US living standards—in purely material terms—seemed more like 10% or 20% higher than in Canada, not 35.6%. I’d be curious what other people think, especially those of you with substantial experience traveling in both countries.
PS. Canada is a perfectly normal developed country. The most interesting question is not, “Why is Canada poorer than the US?” Rather, the key question is, “Why is the US richer than almost every developed country other than Switzerland and Norway?”
READER COMMENTS
Craig
Jul 17 2025 at 6:58pm
“I recently got a note that my umbrella insurance premiums would almost double next year.” <–as an aside my renewal did same FL/TN they cited no reason. The renewal seems excessive for what is essentially 'second banana' insurance.
Scott Sumner
Jul 18 2025 at 10:35pm
It is excessive, but the insurance companies are not to blame. It’s the legal system.
Petey
Jul 17 2025 at 7:03pm
I agree that the USA and Canada seem very similar. GDP per capita, as with all mean statistics, doesn’t do a great job describing a central tendency in the face of outliers. My thought is that the median US person has a similar standard of living to the median Canadian. But the USA has more significant outliers (ie extremely high income people) that are skewing the mean more than in Canada. One possible indicator of this is the Gini coefficient since Canada’s is 0.31 and the US’s is 0.47. This seems to me like a more parsimonious explanation than trying to pin it on various examples of wasteful spending.
Benoit Essiambre
Jul 17 2025 at 9:34pm
“I suspect that Canada has a less predatory legal system” Indeed we learned in intro to law class that awarded damages were much smaller in Canada than the US. You basically really have to want justice or to set an example because you’ll often not even recover the legal fees if you win.
The other thing to point out is that the outsize US GDP is concentrated in a few states. I think Canada has GDP per capita that is higher than or close to that of many US states.
steve
Jul 17 2025 at 9:48pm
GPT says that both car insurance and home insurance average about $1000/year less for Canada than US. Historically there has been a large difference in crime but Canada now has property crime on par with he US, with homicides still much lower. (Property crime is much higher in London and Windsor than in Detroit for example.) You left out education and again per GPT Canada spends about $1500 per year less on K-12 education and post-secondary averages about $10,000 less per year. (I cant tell if that is retail tuition or what they actually pay.)
https://www.fraserinstitute.org/studies/ranking-crime-in-canada-and-the-united-states
Steve
Scott Sumner
Jul 18 2025 at 10:37pm
“You left out education”
Actually, I discussed it.
Rob
Jul 18 2025 at 12:04am
Very interesting post. I often ponder this question, as a resident of New Zealand with some American family members I occasionally visit. While I notice some discrepancies, when I’m there I don’t think it feels like I’m in a society with 50% higher living standards, though I’m not as confident as you seem that I could tell either way (eg, there is regional/local variation in both countries).
Seems like it’s often hard to separate from considerations of how purchasing power parity is measured. For example, NZ lacks an automobile manufacturing sector (so no GDP from that), and subsequently allows a competitive, trade barrier free import sector with a high proportion of second-hand Japanese imports. From what I can tell, we spend a lot less importing vehicles than USA on building them as a proportion of GDP. But is that ‘advantage’ reflected in purchasing power parity adjustments or not? Similarly for your healthcare calculation – to the extent Canada spends less on healthcare because of lower prices (say, the cost of a operation or a doctor’s visit), would that be captured by PPP adjustment or not? Obviously where US healthcare delivers more quantity of care, that won’t be captured, even if the spending is wasteful (eg, unnecessary tests and procedures).
I think you have definitely identified some of the key areas where undeniably USA GDP seems disproportionately dedicated towards activities which contribute little to visible living standards (legal system, incarceration system, military expenditure).
Mactoul
Jul 18 2025 at 12:24am
Perhaps differences in living standards can not be perceived on linear scale but only on logarithmic scale. There, you can easily perceive difference between America and India. America and other first world countries are virtually equally rich on the logarithmic scale and the actual standard of living might be slightly better in one country by one measure and in another by another measure.
Cody Boyer
Jul 18 2025 at 1:42am
I think your points are still directionally right, but my guess is that the tourist experience of a country is biased: on average, tourists tend to visit neighborhoods/cities/regions that are (at least relatively) thriving, and certainly more scenic. Tourists mostly don’t go to the bad part of town, and when they do they mostly don’t stay long. When people vacation in the US, they generally don’t go to decaying rust belt cities.
MarkW
Jul 18 2025 at 7:04am
On a per-capita basis adjusted for PPP, I see only about 25% difference rather than 36%. Canada is right about on par with Finland, the UK, and the EU as a whole–and, economically and politically, doesn’t Canada seem pretty much like a large EU country plopped down next to the US?
Craig
Jul 18 2025 at 10:15am
“On a per-capita basis adjusted for PPP, I see only about 25% difference rather than 36%. ”
One note respecting such figures is that fx rates change and when they do the comparisons can swing quite a bit.
Robert EV
Jul 18 2025 at 4:01pm
Violet Crumble is easier to find in Canada than in the US, but my experience visiting Canada is limited to a ski resort visit with my parents and solo driving through southern Vancouver at night once, around the turn of the millennium. The ski resort included a bit of exposure to their healthcare system. They were out of shampoo, but conditioner was adequate to clean blood out of hair, and the stitches seemed fine.
Andrew_FL
Jul 18 2025 at 7:47pm
I definitely don’t agree that the government could force Americans to spend less on healthcare without drastically worsening out standard of living.
Rajat
Jul 19 2025 at 1:10am
I tried to nut this out at your previous post, but one point that I didn’t think of at the time and that no one has raised here is income inequality. The US Gini coefficient is around 0.4 and around 0.3 in Canada (slightly higher than that in Australia). And I believe it is based on pre-tax income, whereas I presume Canada (and certainly Australia) has a more progressive income tax scale than the US. So if you try to observe evidence of large differences in GDP per capita just by driving around most parts of a country, it is not surprising that the answer is not obvious. From Statista, the top 14.4% of US households have an income of >$US200K. That’s just over $A300k, which cuts in at the 95% percentile of households in Australia. I’m guessing a bit, but the top 14.4% in Australia would cut in at approximately $US130k. The difference in median household incomes is narrower, $US75k vs $US61k, a gap that – making allowances like you do for healthcare, crime and defence – might start looking fairly reasonable. Is it possible that much of the gap in living standards might be explained by the differences between the lifestyles of the top 10% of US and Canadian (or Australian) households? Maybe they have much flashier houses, furniture, cars, holidays, and you don’t notice that so much unless you get close to the locals?
Roger McKinney
Jul 19 2025 at 9:08am
The fatal flaw of all inequality measures is that they use money income as the measure. But living standards rose in the West through falling prices, not through higher wages. The industrial revolution reduced the cost of food, clothing, transportation and housing, making the same dollars buy more. In a gold standard with a fixed stock of gold, prices would have fallen for everyone, making them richer. But inequality measures would show no improvement at all. Entrepreneurs would get a temporary rise in income, but not from consumers. Their increase would come at the expense of competitors until they caught up in technology.
All inequality measures are distorted by money printing from central banks and failure to grasp the wealth creation for consumers of lower prices.
Scott Sumner
Jul 19 2025 at 2:28pm
That’s not correct. Inequality measures are in no way distorted by money printing or aggregate price changes.
Roger McKinney
Jul 19 2025 at 11:27pm
But they don’t measure what actually increases wealth, which is falling costs. They only measure dollar incomes, which would not change with a fixed money supply. But people would become wealthier as the same income bought far more goods. So inequality measures exaggerate inequality.
Matthias
Jul 19 2025 at 8:42am
Switzerland, Norway and Singapore! (And a few others.)
Roger McKinney
Jul 19 2025 at 9:00am
It’s statistical malpractice to compare a tiny nation like Canada to a vast one like the US. Populations must be similar or they may be the determining factor. Also, cost of living must be considered.
Comparing the US to the EU is more accurate. And median incomes tell a better story. In that analysis, the poorest quintile in the US has a living standard equal to the median in the EU. Why? Clearly, the EU has been more socialist longer.
Why Nations Fail by Daron Acemoglu and James A. Robinson does a good job of comparing more capitalist societies with more socialist ones.
Scott Sumner
Jul 19 2025 at 2:31pm
“It’s statistical malpractice to compare a tiny nation like Canada to a vast one like the US. Populations must be similar or they may be the determining factor.”
That’s incorrect, as there’s little difference between the per capita incomes of small and large European countries.
And Canada is not tiny.
Roger McKinney
Jul 19 2025 at 11:35pm
Statistical analysis requires similar sample sizes. And the entities being compared must be similar in all respects except the factor in question, the dependent variable. Canada is tiny compared to the US in population, which may be the determining factor of the dependant variable.
There is a great deal of variation across the EU in per capita GDP. Tiny Luxembourg is much richer than France. The small Scandinavian countries are much richer than the larger southern countries like Italy. And median income is a better indicator than per capita income which is an average and easily distorted by not following a normal distribution. Using median income, the US is much richer.