Chapter 3 – Comparing GDP among Countries
OpenStax
Learning Objectives
- Explain how GDP can be used to compare the economic welfare of different nations
- Calculate GDP per capita using population data
It is common to use GDP as a measure of economic welfare or standard of living in a nation. When comparing the GDP of different nations for this purpose, two issues immediately arise. First, the GDP of a country is measured in its own currency: the United States uses the U.S. dollar; Canada, the Canadian dollar; most countries of Western Europe, the euro; Japan, the yen; Mexico, the peso; and so on. Thus, comparing GDP between two countries requires converting to a common currency. A second issue is that countries have very different numbers of people. For instance, the United States has a much larger economy than Mexico or Canada, but it also has roughly three times as many people as Mexico and nine times as many people as Canada. So, if we are trying to compare standards of living across countries, we need to divide GDP by population.
GDP Per Capita
The U.S. economy has the largest GDP in the world, by a considerable amount. The United States is also a populous country; in fact, it is the third largest country by population in the world, although well behind China and India. So is the U.S. economy larger than other countries just because the United States has more people than most other countries, or because the U.S. economy is actually larger on a per-person basis? This question can be answered by calculating a country’s GDP per capita; that is, the GDP divided by the population.
The second column of Table 11 lists the GDP of the same selection of countries that appeared in Table 10, showing their GDP as converted into U.S. dollars (which is the same as the last column of the previous table). The third column gives the population for each country. The fourth column lists the GDP per capita. GDP per capita is obtained in two steps: First, by dividing column two (GDP, in billions of dollars) by 1000 so it has the same units as column three (Population, in millions). Then dividing the result (GDP in millions of dollars) by column three (Population, in millions).
| Country | GDP (in billions of U.S. dollars) | Population (in millions) | Per Capita GDP (in U.S. dollars) |
|---|---|---|---|
| Brazil | 2,246.00 | 199.20 | 11,172.50 |
| Canada | 1,826.80 | 35.10 | 52,037.10 |
| China | 9,469.10 | 1,360.80 | 6,958.70 |
| Egypt | 271.40 | 83.70 | 3,242.90 |
| Germany | 3,636.00 | 80.80 | 44,999.50 |
| India | 1,876.80 | 1,243.30 | 1,509.50 |
| Japan | 4,898.50 | 127.3 | 38,467.80 |
| Mexico | 1,260.90 | 118.40 | 10,649.90 |
| South Korea | 1,304.47 | 50.20 | 25,975.10 |
| United Kingdom | 2,523.20 | 64.10 | 39,371.70 |
| United States | 16,768.10 | 316.30 | 53,001.00 |
| Table 11. GDP Per Capita, 2013. (Source: http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx) | |||
Notice that the ranking by GDP is different from the ranking by GDP per capita. India has a somewhat larger GDP than Germany, but on a per capita basis, Germany has more than 10 times India’s standard of living. Will China soon have a better standard of living than the U.S.? Read the following Clear It Up feature to find out.
Is China going to surpass the United States in terms of standard of living?
As shown in Table 11, China has the second largest GDP of the countries: $9.5 trillion compared to the United States’ $16.8 trillion. Perhaps it will surpass the United States, but probably not any time soon. China has a much larger population so that in per capita terms, its GDP is less than one fifth that of the United States ($6,958.70 compared to $53,001). The Chinese people are still quite poor relative to the United States and other developed countries. One caveat: For reasons to be discussed shortly, GDP per capita can give us only a rough idea of the differences in living standards across countries.
The high-income nations of the world—including the United States, Canada, the Western European countries, and Japan—typically have GDP per capita in the range of $20,000 to $50,000. Middle-income countries, which include much of Latin America, Eastern Europe, and some countries in East Asia, have GDP per capita in the range of $6,000 to $12,000. The low-income countries in the world, many of them located in Africa and Asia, often have GDP per capita of less than $2,000 per year.
Key Concepts and Summary
Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to do that is with the exchange rate, which is the price of one country’s currency in terms of another. Once GDPs are expressed in a common currency, we can compare each country’s GDP per capita by dividing GDP by population. Countries with large populations often have large GDPs, but GDP alone can be a misleading indicator of the wealth of a nation. A better measure is GDP per capita.
Self-Check Questions
- Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?
- The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681CFA francs per dollar. Calculate the GDP per capita of Central African Republic.
Glossary
- exchange rate
- the price of one currency in terms of another currency
- GDP per capita
- GDP divided by the population
Solutions
Answers to Self-Check Questions
- Yes. The answer to both questions depends on whether GDP is growing faster or slower than population. If population grows faster than GDP, GDP increases, while GDP per capita decreases. If GDP falls, but population falls faster, then GDP decreases, while GDP per capita increases.
- Start with Central African Republic’s GDP measured in francs. Divide it by the exchange rate to convert to U.S. dollars, and then divide by population to obtain the per capita figure. That is, 1,107,689 million francs / 284.681 francs per dollar / 4.862 million people = $800.28 GDP per capita.
