not tell us the absolute dollar amount of price gaps between the two countries. to assess the price - gap level, we use information about the prices of specific goods in both countries gathered from an informal internet survey conducted by bank of canada staff. we record the prices of a list of identical goods in canada and the united states at the same retail outlet. u. s. dollar prices are converted into canadian dollars using the bilateral exchange rate for that day. using these two sources of information, the bank of canada ’ s best estimate is that the canada - u. s. retail consumer - goods price differential was 11 per cent in september, down from 18 per cent in april. in other words, prices of a set of comparable goods in canada are an average of 11 per cent higher than the prices of these same goods in the united states. i caution that these are estimates and there is some uncertainty around them. an important question is why has the gap not narrowed more for similar goods, given the increase in the value of the canadian dollar. for your consideration, allow me to discuss bis central bankers ’ speeches some of the possible factors, both macroeconomic and structural, that influence the prices of goods and services in both countries. first, cyclical issues may be responsible for some differences between canadian and u. s. prices. unexpected economic weakness in one country could lead to an undesirable buildup of inventories and result in local discounting of prices. in addition, as long as markets are partially segmented across international borders, market power may enable firms to respond to local demand conditions — possibly resulting in lower prices in areas with weaker demand. secondly, from a macro perspective, prices take time to adjust. importantly, this is not only true in response to the exchange rate, but also to anything that changes the economic environment ( and this is why there are lags in the effect of monetary policy ). in addition to the macro elements, there are structural factors, including profit margins and underlying costs, that influence the prices of goods and services and that can also contribute to the gap in prices in canada and the united states. operating profit margins for both the wholesale and retail sectors will have an impact on the prices of consumer goods in retail outlets. one possible reason that margins have remained elevated in canada may be that the retail environment is more concentrated in canada than in the united states. in canada, the top four retailers have a 28 per cent market share, compared with only 12 per cent

in the united states. on the cost side, there are a number of factors that are important for understanding the differences in prices in canada and the united states. labour costs tend to be higher in canada than in the united states. for instance, in the retail sector, total compensation per hour is higher in canada. despite this, retail - and wholesalesector employment is higher as a share of total employment in canada, even though retail and wholesale trade in canada each represent a smaller share of real gdp. the latter reflects canada ’ s productivity performance in the retail sector, which has lagged that of the united states. this is partly a result of a much lower level of capital intensity and lower total factor productivity growth. total factor productivity refers to how labour and capital are combined to create efficiency gains. here, industry structure appears to matter, with larger productivity gains from investment at chain stores than individual stores. following 1995, productivity surged in the united states, with investment in new equipment and organizational change. in canada, these effects do not seem to have been experienced to the same degree, perhaps due to the more localized nature of canadian markets. transportation is another factor on the cost side. while fuel costs are only a portion of total transportation costs, the difference in gasoline taxes between the two countries makes gas more expensive in canada. lower population density in canada may also contribute to higher transportation costs on a per - item basis. all of these factors and other domestic value - added services, such as marketing, are priced in local currency. thus, when the value of the exchange rate moves, these costs to canadian retailers, which must be paid in canadian dollars, do not change. for imported goods, reflecting the smaller size of the canadian market, the price paid by a canadian importer of a good may be higher than that paid by an american importer. the canadian market is roughly one tenth the size of the u. s. market, suggesting a much smaller potential for economies of scale. while this may not be as much of an issue for large retail chains with presence in both markets, smaller mostly domestic retail firms could be affected. finally, given all of these factors just discussed, allow me to turn to the role played by the exchange rate in price differentials between canada and the united states. bis central bankers ’ speeches as mentioned earlier, consumer prices tend to be sticky — this is true on both sides of the border. more broadly, the segmentation of international markets, in part due to