COMPARATIVE ECONOMIC STATISTICS:
NATIONAL INCOME AND THE STANDARD OF LIVING

I.    General Problems of statistical comparison

A.   Definitions and accounting standards

B.   Methods of data collection and secrecy

C.   Theoretical, methodological issues (index number problem)

 II.  Uses of Income Comparisons:

A.   As a measure of the standard of living (i.e., GDP per capita).

B.   As a measure of economic size or power (i.e., total GDP).

C.   As a denominator in ratios of trade dependency, debt burden, military spending, etc.

III. Value-Based National Income Concepts

A.   National Income Definitions

1.    Gross domestic product - Total value of all final goods and services produced in the country in a year, where "country" is defined a geographically.  Now the standard concept used by the United Nations, in its standardized System of National Accounts, by the EC, and by most individual countries, including the U.S. 

2.    Gross national product - Similar to GDP, but "nation" includes residents in the country for at least 6 months.  Formerly used by U.S. Commerce Department.  The difference between GNP and GDP is large in countries that pay or receive large incomes from international investments or remittances.

GNP as Percentage
of GDP, 2003

World Development Indicators

3.    Net material product - The total value, measured in final selling prices, of final material production (most services excluded), net of depreciation.  Was used by most socialist countries.  Soviet GNP was only about half the U.S. level, but NMP was about two thirds.

B.   Uncounted Income and Production

1.    Goods produced but not sold - Production by households for family consumption.  If counted, would increase income by 20-33% in U.S. and perhaps 40-50% in many developing countries.

2.    Underground, shadow, or second economy, black market, or informal sector - Production concealed to avoid taxation or regulation.  In socialist countries, the underground economy filled gaps in the plan.  Recent estimates suggest that counting underground production would boost measured GDP in 2005 by about 37% in developing countries, 39% in transitional economies, and 15% in OECD countries.  Shadow production is estimated at more than 50% of GDP in Azerbaijan, Belarus, Bolivia, Cambodia, Congo, Georgia, Haiti, Nigeria, Panama, Peru, Tanzania, Thailand, Ukraine, and Zimbabwe.  
 

C.   Conversion of National Incomes to a Single Currency

1.    Official or market exchange rates - In socialist countries, prices and exchange rates were set by central planners.  In market economies, rates are influenced by government intervention and market fluctuations.

2.    Atlas Method - Three-year adjusted average of market rates to reduce effects of year-to-year exchange fluctuations

3.    Purchasing power parity - U.N. International Comparison Project revalues production in "international dollar" prices. Significantly increases relative sizes of GDPs for most low-income countries.
UPDATE: The newest ICP results have substantially revised the estimates of Chinese and Indian GDP and growth:
Look here and here.
 

Converting GNI per Capita to Dollars:
Three Methods Compared
(U.S. Dollars per person in 2006)

D.   Index number problem - Results of comparisons are affected by price weights.  According to the Gerschenkron Effect, the GNP of country X will appear relatively larger if the prices of country Y are used to sum the products of each country.

IV. Alternative Measures of the Standard of Living

A.   National income per capita - see above.

B.   Physical Quality of Life Index (PQLI) - Developed by the Overseas Development Council.  An unweighted average of index numbers for the infant mortality rate, life expectancy, and adult literacy.  Emphasizes human results rather than consumption, and implicitly reflects the income distribution.

C.   Human Development Index (HDI) - Developed by the United Nations Development Program, and published in its annual Human Development Report.  Similar in some respects to PQLI, it includes three components: health (life expectancy), educational attainment (two-thirds by literacy and one-third by enrollment rates), and access to resources (GDP per capita at purchasing power parity, adjusted to reflect diminishing returns from income).

UPDATE: For current HDI rankings, look here.