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 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)
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 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.
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 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)
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 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.
