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View Full Version : Why GDP per capita does not reflect a population's wealth



Maciamo
12-08-06, 10:35
The most common way to compare the economic development and average income between countries is to compare the GDP per capita, if possible at PPP so as to adjust the income to the cost of life.

However, the GDP only reflects the "official" sum of all money made in the country for one year. There are numerous problems with this :

- it does not take into account the 'black economy', which according to the Economist (http://www.electroniceconomist.com/research/Economics/alphabetic.cfm?term=budget) makes up 5-10% of the real GDP in countries like the UK or USA, up to 30% in Italy, and as much as 50% in Russia. This means that at equal "official" GDP per capita, Italy and the UK do not in fact have the same average income - it is maybe 15-20% higher in Italy, as fewer people declare the totality of their income.

- it does not take into account the accumulated wealth and assets, such as savings, investments (bonds, shares...), real estate properties and other material possessions. The GDP per capita would be a good way to compare citizens' wealth is all people were forced to spend all their income on perishable or consumable goods like food or clothes, and be left with no cash, no house and no other investment or long-term material goods (e.g. furniture, TV...) at the end of each year.

So if a retired person has no income, he/she makes the GDP decrease a bit. But this person could be very wealthy, own several houses and have millions in savings. As the value of real estate and stock investment fluctuate (hopefully upwards), it makes it even more difficult to estimate the real assets own by the population. Not to mention the money of the richest segment often kept in "secret accounts" in Switzerland, the Cayman or other financial paradises.

This shows how ridiculous it is to believe that a country with higher GDP per capita is in fact made of richer people. After WWII, Germany and Japan were left with all their biggest cities razed to the ground. This means that people had to spend a good part of their income to rebuild those houses, companies and public buildings, while countries which had not been physically destroyed during the war did not have too.

For example, Ireland may have been poorer on paper (GDP per capita) than Germany or Japan in the 1970's or 80's, but mostf Irish people lived in nice detached stone houses, while most Germans and Japanese lived in not so nice concrete apartment blocks or cheap houses. Now Ireland's GDP per capita is higher than Japan's, Germany's, or almost any European country. The Germans and Japanese will have to rebuild new, more beautiful and bigger houses, while the Irish won't have too as they already had it and built to last for centuries. (see European trivia (http://www.eupedia.com/forum/showthread.php?t=24078&highlight=eurostats))

Likewise, countries that had experienced a totalitarian regime that nationalised most of the country's assests and real estate properties ended up with less accumulated assets. This is true of Germany, Japan and all the former Communist block in Eastern Europe. It may not appear important, but in the UK or France many big fortunes have/had a lot of their assets in real estate (e.g. castles, land...). The richest person in the UK, the Duke of Westminster, basically lives off his investments and real estate revenues. Considering that some investments are not taxed (e.g. real estate revenues in some countries), most of this money is also not reflected in the GDP, giving the impression that the country is poorer than it really is.

Another form of accumulated wealth is the historical and artistic heritage of a country. It is obvious that if the Osaka City and the the 20 arrondissements of Paris, both with a population of around 2 million, had at one time equal GDP per capita and their citizens had the exact same assets in savings and investments (theoretical case, of course), the Parisians would be better off because of the esthetic and historical value of their buildings.

Finally, the GDP per capita does not take into account income distribution. The gap between the highest and lowest salaries are muc bigger in some countries than in others (e.g. bigger in the USA than in Japan). The GDP per capita being an average, it is important to know how far from this average most people really are, just because a small percentage of the population earns the biggest chunk. That is what the Gini coefficient (http://www.eupedia.com/forum/showthread.php?t=23928&highlight=gini ) tells us.

Naturally, countries with a bigger proportions of immigrants will have bigger gaps between the rich and the poor. Economic immigrants normally do not have much/any accumulated wealth, as they migrate due to a lack of assets and obviously do not own real estate in their host country when they arrive, and have a tougher time to acquire it than "natives". These poor migrants are typically also poorly educated, and so end up with no job or bad jobs in their host country. In other words, recent economic immigrants strongly lower the average of GDP per capita.

Chris
20-07-09, 17:48
I have a different angle. For me, national wealth is best measured by 'wellbeing' or happiness indices, balancing out economic criteria with how good citizens feel about their lives and community. For example: http://www.guardian.co.uk/environment/2009/jul/04/costa-rica-happy-planet-index The UN has had a similar report for some time.

There's no point being loaded with financial wealth if your country is continuously at war, there is a high crime rate, drugs issues, high pollution, expensive healthcare etc.

Cambrius (The Red)
20-07-09, 18:55
I have a different angle. For me, national wealth is best measured by 'wellbeing' or happiness indices, balancing out economic criteria with how good citizens feel about their lives and community. For example: http://www.guardian.co.uk/environment/2009/jul/04/costa-rica-happy-planet-index The UN has had a similar report for some time.

There's no point being loaded with financial wealth if your country is continuously at war, there is a high crime rate, drugs issues, high pollution, expensive healthcare etc.

Very fair points. I would add that the lower the level of social and economic insecurity the happier people are. Good job opportunities, high quality and affordable health care and solid, free education are the essential building blocks of a sound society where people feel good about their lives. Look at what you have (or don't have) in the U.S. ... It is the richest country in the world and ranks pretty awful in all three of the above mentioned areas. And, its social safety net is full of holes.

Cimmerianbloke
22-11-11, 02:56
GDP is just a tool and should be used in coordination with other markers and other statistics in order to draw conclusions. If France has a higher GDP than most of the south of Europe, it is also the country that is the biggest user of antidepressant drugs (http://www.linternaute.com/sante/psychologie/dossiers/06/0609-psychotropes/6.shtml). Similarly, depression and suicide rates are higher in northern Europe, normally richer and enjoying higher standards of living, than let's say, Africa, where suicide is just not part of the culture (http://en.wikipedia.org/wiki/List_of_countries_by_suicide_rate). Overall well-being and mental health statistics would be better markers. On top of that, most rich countries have seen their health declining due to obesity, cardio-vascular diseases, and, the new pandemic, diabetes. Rich, fat and sick, or poor, fit and healthy? If "your health is your wealth", no need to argue further...

Franco
27-11-11, 03:13
GDP per capita may not tell the whole story, but at least it has some real basis unlike other crappy indices like "Happiness index".

FisherWebsites
05-01-12, 04:12
A lot of times I find people comparing countries wealth by GDP alone. At least GDP per capita is a much better indicator as GDP is heavily influence by population. China's GDP for instance is the second largest in the world, but their GDP per capita is much lowers than the United State's, so to compare the two as similar powerful economies isn't really fair.

Source: china dot worldeconomies dot org

FisherWebsites
05-01-12, 04:13
What is happiness index?

Garrick
07-09-13, 14:41
What is happiness index?

Probably it is Happy Planet Index that was introduced by NEF (New Economic Foundation).

"The HPI measures what matters: the extent to which countries deliver long, happy, sustainable lives for the people that live in them.

The Index uses global data on life expectancy, experienced well-being and Ecological Footprint to calculate this. "

Website is:

http://www.happyplanetindex.org/data/

Tomenable
01-09-15, 01:50
I think an example of this is Equatorial Guinea, which is poor (low HDI) despite its very high GDP per capita.

Equatorial Guinea has the 12th highest GDP per capita in the world as of 2008 (80% of U.S. GDP per capita):

https://en.wikipedia.org/wiki/Equatorial_Guinea

https://en.wikipedia.org/wiki/Economy_of_Equatorial_Guinea

Detailed figures from year 2008 for Equatorial Guinea:

GDP per capita, current $US - 23,458.1
GDP per capita at current $US, compared to US (US=100) - 79.84
GDP per capita, current PPP$ - 38,563.7
GDP per capita at current PPP $, compared to US (US=100) - 105.4

Tomenable
27-03-16, 22:09
Interesting graph: http://i.imgur.com/oCs7Vkb.png

http://i.imgur.com/oCs7Vkb.png

ruskabajka
26-07-18, 00:24
how interesting, every few years, there is a new answer to the topic

Tutkun Arnaut
26-07-18, 03:55
Yep! I agree! GDP per capita does not tell how good the citizens of a certain country live. What it accurately tells though is the salary of the teachers of any country. Let say Albania which I know has a yearly per capita incomes of $5400. That is exactly the average money a teacher makes a year. The USA has a per capita incomes of $60 000. That also is the average salary of a teacher. So Does Poland.

But the main instrument to measure well being of any country is not the amount of money in the bank or number of cars. Its health. If one is healthy life is tasty. Everything tastes good. So the health of overall population should be used as measure.