GDP Doesn’t Matter, GDP Per Capita Does

It’s 2008, and it looks like the US (and the globe?) may be headed for recession. Even if the economy doesn’t actually enter a recession (defined as two quarters of negative GDP growth), it will enter a period of slower growth during 2008. Just how much will that slower growth affect the US worker and population at large? While GDP measures the size of the total economy, it’s GDP per capita, the slice of GDP that an “average” American has, that really matters. While GDP per capita doesn’t take into account income inequality and other measures that impact individual well-being, it does a much better job of measuring how economic growth is impacting our lives over time.

There’s another reason we should look at GDP per capita instead of GDP: America’s population is growing steadily, at a rate of 1% per year. If illegal immigration is added (and it should be, since illegal workers’ economic contributions are counted in GDP), the population is growing at 1.2% per year. In order for Americans to maintain their standard of living, GDP needs to grow at least as fast as the population! In many European countries, and in Japan, 0 GDP growth doesn’t impact living standards, since population growth has stagnated as well, while many countries in Africa need GDP growth above 3% just to stay above water.

So what do the numbers show? American GDP growth averaged 2.7% for much of the 2000’s, while population growth averaged 1.2%, implying a net GDP per capita growth of roughly 1.48% per annum over that period. Over the same period in Europe, GDP growth averaged 1.6%, but since population growth was close to 0, Europe’s GDP per capita growth is identical to America’s. Japan’s growth has slowed in the last two decades, but since their population has not grown, standards of living are increasing in line with other developed countries.

The media typically dwells on GDP growth alone, without taking into account population growth when making comparisons. This leads to false impressions about the state of the economy – if the upcoming slowdown drags American economic growth down to 1%, Americans will feel a recession, because on a per-capita basis, they are becoming poorer. And if a real recession occurs, Americans may actually feel a 2-3% decrease in their share of GDP, which amounts to around $1000 per person – no small pocket change for most.

5 thoughts on “GDP Doesn’t Matter, GDP Per Capita Does

  1. Is USA’s GDP per capita really $48,000 as CIA factbook states? More realistic figure would be somewhere $15,000 closer to East Europe.

  2. We may not fit the terms of an official <a href=”http://recession.org”recession yet (thanks stimulus check) we just had the first retraction in our GDP of .03% so its on its way!

  3. Good point – in the US, at least, median real disposable income would be a better metric. That’s not as true in Europe or Japan, which have much higher rates of public spending, however – and GDP per capita is readily available for almost all countries.

    I’ve really conflated two points here, perhaps ineffectively: 1) Using GDP growth as a measure of economic advancement is inaccurate, and overstates America’s lead on other developed economies, and 2) in a recession, the bite will be far worse than the media/politicians tell us, because both negative growth and population are working against us.

  4. An important observation as always. You noted that:
    While GDP per capita doesn’t take into account income inequality and other measures that impact individual well-being, it does a much better job of measuring how economic growth is impacting our lives over time.

    I’m curious if you considered median real disposable personal income as a potentially better measure that accounts for both population growth, income inequality, inflation, and taxes/transfers. The median better reflects the slice “an “average” American has” as opposed to the “average slice an American has.” Adjusting for inflation and taxes/transfers reflects the what the “average American” actually has for saving and spending.

    I imagine different measures are appropriate for different applications. For example, I think the one I mentioned might be an important driver of presidential politics.

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