Sunday, 16 May 2010

GDP per capita – BRIC vs PIGS vs UK, USA, Germany

We hear every day about the gross domestic product (or GDP) of countries. For example, it is always seen as negative if GDP is decreasing (by definition the UK enters a recession if there are 2 quarters of negative GDP) and positive if GDP is increasing. For the Average Joe on the street though I think GDP is not as important as GDP per capita which just doesn’t seem to ever discussed in the media or by government. For example:
- In an extreme I think if GDP started to fall but the population (through migration for example) fell at a faster rate then it is very possible that a person’s standard of living could actually be increasing. This is because the average persons GDP per capita would be increasing meaning that they should also be increasing their salary.

Additionally we are always hearing about the BRIC countries (Brazil, Russia, India, China) that are all rapidly developing economies which should mean their GDP per capita is increasing at a fast rate leading to rapid standard of living improvement. We also hear of the PIGS (Portugal, Italy, Greece, Spain), who I’ve also posted about on a number of occasions recently, whose governments are seen to have been fiscally imprudent by running high government deficits. But what I am interested in is what does this all mean for the Average Joe on the street?

To answer this question I have looked through old issues of the CIA Factbook to find the GDP’s per capita of the BRIC/PIGS countries and compared them to the UK, USA and the economic power house that is Germany. The CIA Factbook prices GDP per capita for every country in US dollars (USD) which is beneficial because it means that in theory we can directly compare the standard of living of the Average Joe’s in every country. (Note that of course this is dependent on the exchange rates being a ‘true’ rate of exchange for similar goods/services which is not always the case however it’s the best I can do for this comparison).

My first chart today shows all these countries and appears to show that everyone’s GDP per capita has been increasing greatly leading to an implication that everyone’s standard of living has also been improving. Of course this is not the full story as $1 today doesn’t buy as much as it did in 1993. I’ve therefore adjusted for the inflation that we have seen over this period which is my second chart.

So what does this all show? Well firstly let’s have a look at whose GDP per capita is increasing at the fastest rate. In order of GDP per capita increase:
1. India
2. Greece
3. China
4. Russia
5. Spain
6. Portugal
7. UK
8. Germany
9. Brazil
10. USA
11. Italy

These results surprised me a little. Why was Greece at number 2? It seems likely that the GDP per capita improvement is actually artificial and has been brought about by the excessive borrowing of the country. This means that the Greeks standard of living has risen too quickly and should fall back with time. If the austerity measures can be implemented then this will surely be the case.

I think the relatively low ranking of the UK is for 2 reasons. The obvious one is that countries like India & China started at a very low level of efficiency and with the rapid development that is occurring are seeing large efficiency improvements (automation as well as process) as well as performing higher value adding activities. However at the risk of sounding stereotypical I also think that there is another reason. Having travelled extensively through India and China I believe that a lot of the people have seen what the west has and they are hungry for it. This means that they in many instances they are extremely hard working and motivated. On the other hand a lot of people in the UK seem more interested in work life balance and have a much more relaxed work ethic. I’m not saying either is right or wrong. It just means that the standard of living in India and China will rise in relation to the UK and people in the UK shouldn’t complain about it when it occurs.

So as of 2009 which countries have the highest standard of living today? In order of GDP per capita:
1. USA
2. UK
3. Germany
4. Spain
5. Greece
6. Italy
7. Portugal
8. Russia
9. Brazil
10. China
11. India

No real surprises here. What it does however highlight is the great discrepancies that still exist between the average standard of living enjoyed by people of different countries. For example the ratio of the US GDP per capita to that of India is still around 15. The BRIC countries still have a long way to go before they enjoy the standard of living of us in the west.

We in the west are clearly still in a very privileged position. However in my opinion we should not take it for granted which I think is currently the case in many instances.

As always do your own research.

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