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Why I Couldn’t Care Less about GDP per capita and Why You Shouldn’t Either

April 24, 2011

By Jessica Nabongo

While reading Charles Kenny’s new book, Getting Better: Why Global Development is Succeeding and How We can Improve the World Even More, it brought back thoughts that I have previously had. I haven’t finished the book just yet (and plan to do a review here when I do) but I just wanted to share some thoughts that were sparked by Chapter Two: The Bad News: Diverging Incomes.

 Many people who have been in debates with me know that I think that GDP per capita is a very poor measure of the well being of citizens in a country and I also do not understand why it is used. I am sure this answer will be clear to me when I read Mismeasuring Our Lives, written by Stiglitz, Sen and Fitoussi which is in my reading queue. My general argument is that we cannot look at GDP per capita because firstly, it does not consider income distribution (thus income inequality or GINI coefficients) and secondly it assigns income to non-working people, as it is a division of the GDP by the entire population.

Let us look at the US, which is the world’s largest economy at $14.12 Trillion with a GDP per capita of $45,989 making it the 6th country in terms of GDP per capita ranking (2009 World Bank). So these numbers assume that the average US household, which is 2.59 people (US Census 2008) would be $119,103.74 (GDP per capita x 2.59), when in fact the average US household income in 2008 was $52,029 or less than half of what GDP per capita predicts (Yes I know my data is from 2008 and 2009 but I am sure you see my point).

 Furthermore, in the US, according to Business Week magazine, using statistics from The Boston Consulting Group, the US has 4,585,000 millionaire households. the most in the world, yet the average household income in 2008 was $52,029. So if you consider how many millionaires it takes to bring the number that high, think of how many poor households it takes to bring the number that low.  In 2009 43.6 million Americans were living in poverty which is 14.3% of course this is relative poverty as opposed to extreme poverty (which is suffered by the poor living in the world’s poor countries) but yet and still the US’s poor are masked by its number one position on the global financial food chain. The 2009 federal poverty rates can be seen in the chart below.

 The point of all of this is that if GDP per capita gives us a crappy picture of the realities in the US, how foggy is the picture in other unequal countries? For countries that have low GINI coefficients, such as those in Scandinavia, the GDP per capita is likely to be much more accurate than that of unequal societies, in terms of income distribution.

If you have a strong case for GDP per capita please share it below or if you think my line of thinking is completely off base, I would like to hear that too!

 Just to leave you with a thought……

 According to Charles Kenny, “Africa’s average current income is a little below that of Western Europe in 1850, and similar to that of the UK at the start of its Industrial Revolution.”

Now if only we could only equate the amount of total wealth that has accrued from natural resources exported from Africa and the free slave labor that built many western companies.

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7 Comments leave one →
  1. Matt Eldridge permalink
    April 26, 2011 8:12 pm

    Thanks for that well thought out commentary, Jessica. I think most economists would agree with you that GDP per capita is not a sufficient measure to assess developmental prospects and to track improvements or backsliding. GDP per capita is, however, still a useful measure if it is used to supplement others, such as the GINI and HDI (both of which have flaws as well). What GDP per capita tells us, is the amount of financial resources availible in country X relative to its population. It does not tell us whether those resources are fairly distributed or not but this is clearly an important figure to be aware of. Also, as you demonstrate, it can lead to interesting insights when it is plotted against other measures. Take median household income, as you do. Up until the late 1970s, GDP per capita and median household income increased at a comparable rate. Since then, there has been a major divergence. Answering ‘why?’ is an important policy discussion but understanding GDP per capita helped lead us there. I also have a more nit-picky point, but comparing an annual figure such as family income per year with an absolute figure such as ‘millionnaire households’ is not fair because a family making $50,000 a year could be a millionnaire household if its assets (for example a house) were valued in total to be worth over one million. Your larger point is well taken, however, and thanks again for highlighting the trickiness of using GDP per capita as a measure of development, particularly in countries with high inequality.

    • Jessica Nabongo permalink
      April 30, 2011 6:34 am

      Point taken Matt about the absolute figure. I knew in the calculations that this wasn’t a perfect number but again I was using it to prove a point and while it is possible that those million dollar households could have incomes of $50,000 I am sure that is the exception more than the rule.

      After reading an article in the NYRB by Sen (which Fio sent me) I realized that I forgot to also talk more about other indicators of well being such as literacy, health, mortality rates, etc. In the link below Sen talks about going beyond economic growth, GNP and GNP per capita. He does an interesting comparison of Bangladesh and India in section 2 and Bangladesh has half the GNP per capita of India so it is interesting.

      http://www.nybooks.com/articles/archives/2011/may/12/quality-life-india-vs-china/

  2. miray permalink
    April 27, 2011 11:00 am

    i absolutely agree with jessica, and the examples she brings up why gdp is an inapproriate measurement are only a very few to mention. Development is multidimensional. I hope that in the future the discussion about measuring a countrys well being will continue shifting away from gdp, exploring new or better measurement tools. And thanks for the book suggestions as well, jessica.

  3. Ricardo Habalian permalink
    May 21, 2011 8:51 pm

    Hey Jessica,

    I largely agree with your criticisms against using GDP per capita as the only indicator used to measure a country’s degree of social development or a society’s wellbeing. (real) GDP per capita is, strictly speaking, a measurement that reflects the quantities of useful things (material or not) that are produced AND traded as commodities (that is, that are produced for a market and exchanged for a price which, in capitalist production, is determined by the average cost plus a profit margin).

    Apart from your critique based on inequality, I think one can point out another important issue which is that commodities and commodifiable things (things that can be sold in a market for a price) can only be means for social and cultural development or spiritual satisfaction. And, of course, talking about a quantity of “means” is not the same as talking about quantities of “ends”… one would need to take into account the way in which the means are used to obtain the given objective. The question of why people in a rich country are unhappy (or, for that matter, of why Britney Spears got so depressed if she had all the money and fame in the world) is a hard question only for a mind that is too immersed in abstract concepts and ends up forgetting that reality has priority over the abstractions (unfortunately, we economists tend to have this problem). I don’t remember which one of The Beattles said something like “we have all the money and fame we could ever want…but that isn’t peace of mind, now is it?”

    But I do think that GDP per capita is a very useful abstraction. For example, by measuring the totality of commodity production, and if one assumes that the majority of production is commodity production (as it normally is in capitalist societies), it can tell you whether a country’s poverty is mainly caused by distributive or productive problems, answering an important political question. The GDP per capita of a poor sub-Saharan country tells you, for example, that everyone will be close to starvation if you distributed commodity production in the country equally; therefore, a distributive reform will only be developmental if it is designed with the purpose of increasing total production (like the land reform policy in Taiwan or South Korea).

    There is another use for GDP per capita I like, especially for World GDP per capita. A certain 19th century Prussian social thinker once said that capitalist societies have the historical goal of creating the social and technical conditions necessary for the satisfaction of humanity’s material desires, thus creating the means for the eventual spiritual realization of our species. Right now, world GDP per capita is approx. 23$ per day, much higher than the death-by-physiological-causes threshold (18 times higher). This tells you that humanity’s material necessities can be satisfied with today’s production, and there are almost 7 billion of us. If we take my point made earlier, this means that there is significant room for change in distributive reform, if seen internationally. Even if thought of just abstractly, this is, I think, an incredible revelation.

  4. John permalink
    June 13, 2013 6:02 am

    GDP is an many ways a measure not of productivity but instead of specialization. When a gardener eats their own product they reduce GDP. When children make their own toys they reduce GDP. When parents take care of their own children they reduce GDP.

    So at the end of the day for the US to say that they have the highest GPD per capita in the world is merely to point out that this is the population of people who do the least for themselves.

    It is very simple to see the correlation between GPD per capita and prevalence of obesity.

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