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/income - GNP or GNI - 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, and tends to be large in countries that are "tax havens" (income reporting homes for corporations that are producing elsewhere). Ireland is a special case. Many foreign companies have set up operations in Ireland, which already has relatively low taxes, with a controlling shell company located in an even more tax-free nation, taking advantage of Ireland’s regulations that specify that the controlling owner, rather than the resident company, is subject to tax. For this reason companies such as Google, Yahoo, Microsoft, Forest Labs, and many others channel license revenues and royalties through Irish subsidiaries. These royalties and revenues are largely excluded from the tax base in Ireland (source).

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. Tends to be larger in countries with weak institutions, high taxes and regulations, and limited formal emloyment opportunities. Because it is intentionally hidden, its size is not known accurately, but its difference from measured GDP can be estimated in several ways, including monetary circulation, electricity consumption, lights seen at night in outer space, survey methods, discrepencies in national income accounts, and multiple-indicator methods, such as the one used to compile the following table.
  
 

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 (PPP) - U.N. International Comparison Project revalues production in "international dollar" prices. Significantly increases relative sizes of GDPs for most low-income countries.

Converting GNI per Capita to Dollars: Three Methods Compared, 2019
	Ex. Rate	Atlas	PPP
Singapore	59216	59590	92270
Qatar	60530	61180	91670
Bermuda	118717	117730	86600
Luxembourg	73351	73910	77570
Switzerland	83614	85500	72390
UAE	43310	43470	70430
Ireland	62402	64000	70010
Norway	78556	82500	69610
USA	66076	65850	66080
Hong Kong	51228	50800	65730
Denmark	61946	63950	61960
Germany	47709	48580	57810
Sweden	52909	55780	57220
France	41330	42450	50460
Saudi Arabia	23367	22840	49520
UK	41577	42220	47880
Japan	41710	41710	44810
Czech Rep.	22053	21940	40640
Russia	11226	11260	28270
Turkey	8970	9690	27660
Chile	14296	15010	24140
Mexico	9657	9480	19990
Botswana	7354	7650	17140
China	10234	10410	16790
Libya	7826	7640	16130
Brazil	8488	9130	14890
Vietnam	2562	2590	7910
India	2079	2120	6920
Nigeria	2159	2030	5190
Niger	583	600	1330
Liberia	553	580	1320
Mozambique	497	490	1310
Congo DR	560	530	1110
Malawi	397	380	1080
C. African Rep.	507	520	1060
Burundi	265	280	790

Source: World Bank, World Development Indicators, online.

D.   Index number problem - Results of comparisons are affected by price weights.  According to the Gerschenkron Effect, the GNP (or other production/consumption aggregate) 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 (mean of years of schooling for adults older than 24 and expected years of schooling for children of school entering age), and access to resources (GNI per capita at purchasing power parity, measured on a logarithmic scale to reflect diminishing returns from income).

D.   OECD Better Life Index - Developed by OECD, this is perhaps the broadest of all of the synthetic indices, because it has eleven components: Housing, Income, Jobs, Community, Education, Environment, Civic Engagement, Health, Life Satisfaction, Safety, and Work-Life Balance. However, because it requires such a variety of data, it's available for only about 40 countries (mainly those that are members of OECD) and many of the data are missing for those. The interactive web site is available here and the underlying data are available here.  Currently, with equal weights for the indicators, the top ranking countries are Norway, Australia, Iceland, Canada, and Denmark.

E.   Happy Planet Index - Originally developed by the New Economics Foundation in the UK, and now maintained by the Wellbeing Alliance,this index focuses on life expectancy (LE), survey-based life satisfaction (LS), and "ecological footprint" (EF, the average amount of land needed, per head of population,to sustain a country consumption patterns and CO2 emissions). The formula is roughly (LE x LS)/EF .  This leads to a VERY different set of country rankings than those related to GDP, HDI, or "Better Life."  By the sustainability-based Happy Planet ranking, Costa Rica, Vanuatu, and Colombia are at the top of the 2019 list, and Norway drops to number 38. China is ranked 94th and the USA is ranked 122nd.

Sources:  GNP measures - World Bank, World Development Indicators; HDI (Human Development Index) - UN Development Program, Human Development Report Database; Well-Being  - Happy Planet Index measure of well-being, based on arithmetic mean of responses to the Ladder of Life question in the Gallup World Poll.  Well-being surveys were taken in 2012.