GDP and Comparing Nations

Comparing Nations

• When comparing nations using GDP, two primary factors must be considered:
  • Currency and Purchasing Power Parity (PPP)
  • Population

Currency and Purchasing Power Parity (PPP)

• Nominal GDP figures are often converted to a common currency (e.g., U.S. dollars) for comparison.
• However, exchange rates don't always reflect the actual purchasing power of a currency within its own country.
• PPP attempts to correct this by comparing the cost of a basket of goods in different countries.

Top Ten Countries by Nominal GDP at Current U.S. Dollar Exchange Rates

Population

• A country's total GDP doesn't tell the whole story; we need to consider GDP per capita (GDP divided by population).
• GDP per capita provides a better measure of the average living standard in a country.

Other Issues with GDP

• Besides the challenges in comparing nations, there are other inherent issues with GDP as a measure of economic well-being:
  1. Excluded Production
  2. Income Distribution

Excluded Production

• GDP does not include non-market activities such as:
  • Household work (e.g., cleaning, cooking, childcare)
  • Volunteer work
  • The underground economy (illegal activities, unreported cash transactions)

Income Distribution

• GDP is an aggregate measure and doesn't reflect how income is distributed within a country.
• Two countries can have similar GDPs, but vastly different income inequality.
• The top 10% income share is one metric used to assess income distribution.

Top 10% Income Share (1917-2012)

• Figure 1 illustrates the top decile income share in the United States from 1917 to 2012.
• It shows the percentage of total income earned by the richest 10% of the population.
• The graph includes data both including and excluding capital gains. Capital gains representing profits from the sale of assets, can significantly skew income distribution figures.
• The data shows that income inequality has fluctuated significantly over time.