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, 2010

Timor-Leste 362
Tuvalu 162
Kiribati 151
Lesotho 124
Marshall Is. 121
Bangladesh 109
Kuwait 106
Switzerland 106
Pakistan 104
Germany 102
USA 101
UK 101
Ireland 84
Congo, Rep. 75
Luxembourg 68
Puerto Rico 66
Equ. Guinea 64

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)

 

Simple Exchange Rate Method

World Bank Atlas method

ICP Repricing Method

Norway

71,863

68,440

50,070

United States

44,070

44,710

44,070

Singapore

28,543

28,730

43,300

Switzerland

55,752

58,050

40,840

Netherlands

42,065

43,050

37,940

Canada

38,486

36,650

36,280

Sweden

42,402

43,530

34,310

Australia

35,996

35,860

33,940

UK

39,919

40,560

33,650

Japan

35,153

38,630

32,840

Germany

35,561

36,810

32,680

France

36,984

36,560

32,240

Russia

6,725

5,770

12,740

China

2,025

2,000

4,660

India

817

820

2,460

Kenya

625

580

1,470

Nigeria

696

620

1,410

Tanzania

320

350

980

Ethiopia

172

170

630

Congo,DR

134

130

270

Liberia

138

130

260

Source: World Bank, World Development Indicators


 


 

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.

 

Alternative Measures of the Standard of Living, 2005

 

Real GDP per Capita (PPP$)

Human Development Index

Index of Economic Freedom

Global Competitiveness Index

 

value

rank

value

rank

value

rank

value

rank

Norway

47,551

1

0.968

1

69

10

5.2

8

U.S.A.

41,674

2

0.951

7

80.6

3

5.67

1

Hong Kong

35,680

3

0.937

9

90.3

1

5.37

6

Canada

35,078

4

0.961

3

80.2

4

5.34

7

Australia

32,798

5

0.962

2

82.0

2

5.17

10

Sweden

31,995

6

0.956

4

70.4

9

5.54

2

U.K.

31,580

7

0.946

8

79.5

6

5.41

5

Germany

30,496

8

0.935

10

71.2

8

5.51

3

Japan

30,290

9

0.953

5

72.5

7

5.43

4

France

29,644

10

0.952

6

65.4

12

5.18

9

Saudi Arabia

21,220

11

0.812

13

62.8

13

4.55

13

Chile

12,262

12

0.867

11

79.8

5

4.77

11

Russia

11,861

13

0.802

14

49.9

20

4.19

17

Mexico

11,317

14

0.829

12

66.4

11

4.26

15

Egypt

5,049

15

0.708

17

59.2

14

3.96

18

China

4,091

16

0.777

15

52.8

19

4.57

12

Indonesia

3,234

17

0.728

16

53.9

17

4.24

16

India

2,126

18

0.619

18

54.2

16

4.33

14

Nigeria

1,892

19

0.47

19

55.5

15

3.69

19

Ethiopia

591

20

0.406

20

53.2

18

3.28

20

Sources: 2005 International Comparison Program, Tables of Final Results, 2008; United Nations Development Programme, Human Development Report, 2007-2008; World Economic Forum, Global Competitiveness Report, 2007-2008.