Tag Archives: GDP Comparisons

Do we need another measure of economic prosperity?

I have written on this blog about the limitations of GDP as a measure of the standard of living in a country and would recommend reading Diane Coyle’s book ‘GDP: A Brief but Affectionate History’. Edoardo Campanella wrote a piece for Project Syndicate about abandoning GDP and how people have concerns with the pace of growth and how it is defined. He mentions two specific reasons for this:

1. Growth in the developed world has brought little benefit to the vast majority of citizens – the recovery in 2010 say the top 1% earn 93% of income growth.
2. Growth doesn’t actually take into consideration a lot of those things that contribute to human wellbeing. There is nothing about environmental conditions, the benefits of communities, the stability of individual and group identities etc

However today GDP determines a country’s status and access to clubs such as the OECD, G8, G20 thereby affecting the balance of global power.

Limits of GDP

GDP is a measure of the market value of all final goods and services produced in a year however it leaves out things that make us richer as people. For instance:

GDP declines if energy-efficient products reduce electricity consumption but rises with polluting activities that deplete the stock of natural resources. Also if we invest in anti-smoking campaigns or fight global terrorism, GDP will increase, without creating any wealth.

GDP is fixated on more not better – a car with air conditioning and a state of the art stereo system and GPS may be the same as one with no gadgets, regardless of differences in users’ experience. How do we measure the success of medical advancements especially in heart surgery that lead to greater life expectancy and a much better quality of life. One of the aspects that GDP misses are those things that are free in society, most notably the services provided on the Internet whether it be Wikipedia, Facebook, Twitter etc. But some have argued that innovation actually reduces GDP even though it may increase the welfare of individuals. Today you can book accommodation, flights, buy products etc online and at a cheaper price than before as the middle person is now excluded from the process. Another example is the price of a smartphone is lower than the prices of its components that used to be sold separately.

Adjusting the numbers

In an effort to update their methodologies, countries add new activities to its calculations. Most recently drugs, prostitution, and other undercover activities have been included in the calculation. However as Edoardo Campanella points out these changes can distort the value of GDP across time. In 2010 Ghana announced a 60% increase in GDP after updating its data-reporting methodology but the the standard of living for Ghanaians hadn’t changed. Likewise the changes in the tax domicile of some multinationals in Ireland resulted in an increase in GDP by 16% but no one felt any richer.

Cross Country Comparisons using GDP – China v USA

There are problems in the cross-country GDP comparisons. 2014 saw the overall GDP of China surpass that of the USA. But a more accurate indicator would be GDP per person and China’s per person income amounts to only 27% of the USA. See figures below:

gdp-china-v-usa
Source: IMF

Are we any happier with more growth?

Countries maximize their output through technology, free trade (with comparative advantage) with the belief that greater GDP improves the well-bing of its population. Herek Bok of Harvard observed that “people are essentially n happier today than they were 50 years ago, despite a doubling or quadrupling of average per capita income”.

Another area that GDP does not consider is the distribution of income – two countries may be equal in overall GDP figures but differ greatly when you consider individual welfare. The elite have been rewarded disproportionately while many have been made worse off – the income of the top 1% has doubled since the late 1970’s at approximately 22% of GDP.

The way forward

As Edoardo Campanella suggests, rather than getting rid of GDP it should be refined and include socioeconomic indicators including GNH*. GDP cannot measure much of what people would consider crucial for a ‘good’ life – community, relationships, security etc.

*GNH – Bhutan is famous for its Gross National Happiness indicator which revolves around four pillars:
1. Sustainable Development
2. Preservation and promotion of cultural values
3. Conservation of the natural environment
4. Good governance

Sex and Drugs and Italy’s GDP

EI-CH575_OUTLOO_NS_20140608150304The Italian statistical body recently announced that it will include prostitution, drug trafficking, and alcohol-and-tobacco in its calculation of GDP. However Italy is just complying with international accounting standards and reporting illegal economically productive activity is required under European Union rules. But as it is part of the informal economy how do you actually measure drug deals, prostitution etc and therefore its contribution to a country’s GDP?

Holland’s Coffee Shops

Coffeeshops are establishments in Holland where the sale of cannabis for personal consumption by the public is tolerated by the local authorities. Holland already counts cannabis sales as coffee-shop revenues and the EU is looking for greater comparability in the GDP figures which is used to distribute funds from the EU budget. Therefore member states who have a high percentage of their GDP in illegal activities will have their assistance from the EU reduced. See graph from Wall Street Journal.

Countries like Columbia have traditionally had a very large informal economy – drug trafficking – and it is estimated that between 1980 and 2012 that shadow activity varied between 27% and 56% of GDP.

OECD GDP per capita figures – 2012

Here are Gross domestic product per capita figures for the 34 member countries of the OECD (Organisation for Economic Co-Operation and Development) for the 2012 calendar year on a purchasing power parity (PPP) basis. Purchasing power parity (PPP) is when an amount of money in one country can be exchanged for a quantity of foreign currency, and the two amounts will buy identical baskets of products in both countries – see recent post on the Big Mac Index.

The OECD is a group of countries that share a commitment to democratic government and the market economy. New Zealand has been a member of the OECD since May 1973. Currently, there are 34 member countries, with four new members joining in 2010. These included Chile, Slovenia, Israel, and Estonia.

OECD - GDP per capita 2012

World GDP by country

Just looking at GDP calculations and the size of economies with my A2 class. Below is a graph showing the top 10 economies in the world by GDP and also how Australia and New Zealand compare in size. World GDP in 2012 was US$71,707bn which indicates that the US economy makes up around 21% of global GDP.

Global GDP

Libya – Fastest growing economy in 2012 but what does it mean?

The Daily Chart in The Economist recently looked at the fastest growing and contracting economies since 1980. The main points:

Fastest Growing: In 2012 Libya with 122% growth came out on top – due to the recovery of oil production. However you must remember that this is a % change from the previous year when the economy contracted by about 60% with the civil unrest and the departure of foreign oil companies. Statistically this creates a smaller base when you calculate % change.

If a country’s GDP shrinks by 60%, it must grow by 150% just to restore its former size. Thus even if Libya fulfills the IMF’s forecast for this year, its GDP will still be smaller than it was in 2010

The Economist also looked at other countries that had fast growth rates but this was predominately due to a disaster of some sort in the preceding year or the discovery of a natural resource.

Equitorial Guinea – In the 1990‘s very poor and depended on cocoa and timber for income. 1996 they discovered oil and attracted FDI. After producing 80,000 barrels per day increasing GDP by 150%.

Kuwait – contracted 41% during the first Gulf War on 1991 but grew 50% the next year as growth started to return.