Sunday, November 25, 2007


The OECD recently released a new international comparsion of GDP and consumption per capita (link).

GDP is the most frequently used measure of economic activity of the country. It is difficult to estimate income levels across countries. Using exchange rates is not always the best and most appropriate way to compare GDP per capita between two or more countries. For example, Denmark and the United States differ dramatically in this respect. Using exchange rates conversion of the GDP per capita, Denmark has a higher nominal GDP per capita than the United States. However, using purchasing power parity as a method of conversion, the real GDP per capita of the United States is higher than Denmark's GDP per capita. When currency conversion rates are taken into account, Denmark's GDP per capita turns out to be lower than that of the United States. That is because price level is higher in Denmark than in the U.S.

True, purchasing power parity provides a clearer picture of a relative economic performance of selected countries. To compare living standard, consumption per capita is equally important. Higher level of the GDP does not neccesarily mean higher level of household consumption because savings-to-GDP ratio is variable in a cross-country comparision. But the consumption can be misleading, depending on different distribution of government services in different countries. Thus, it is more appropriate to measure the relative household consumption levels and see what households consume actually. It should be noted that there is, however, no static relationship between household consumption and GDP per capita. A GDP of the particular country may be high above the average, while the actual household consumption may be just below or slightly above the average.

Nonetheless, GNI (gross national income) also takes into account international flows and transfer payments. In Switzerland's case, moving from GNI to GDP can respectively change the entire picture. According to OECD's figures, Swiss GNI per capita is 30 percent over the OECD average, which means that net transfer payment pour into Switzerland. The GDP per capita of Switzerland is, for instance, 122 percent of the OECD average. In case of Ireland, the GNI per capita is 146 percent of the OECD. In terms of GDP per capita, the ratio falls to 110 percent of the OECD average. The investigation of GDP and GNI in Luxembourg is similar. In GDP per capita terms, the GNi per capita falls from 246 to 200 percent of the OECD average. This shows the presence of significant net transfers out of the country.

Consumption and Real GDP per capita; An International Perspective

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